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Better Artificial Intelligence Stock: Palantir vs. Microsoft

AInvestSunday, Nov 10, 2024 6:38 pm ET
2min read

In the rapidly expanding artificial intelligence (AI) market, two companies have emerged as leaders: Palantir Technologies (PLTR) and Microsoft (MSFT). Both have profited from the AI boom, but which is the better investment for growth-focused investors? Let's examine their AI-related revenue growth, market shares, product offerings, risks, and valuations to make an informed decision.

1. AI-related revenue growth and projections:Palantir's AI-related revenue growth has been impressive, averaging 37% over the past five years, with analysts projecting a 23% compound annual growth rate (CAGR) for the next five years. Microsoft, however, has shown more consistent growth, averaging 17% over the same period, with analysts projecting a 15% CAGR for the next five years. Although Palantir's growth is higher, Microsoft's stable and diversified business model makes it a more balanced choice for long-term investors.
2. Market shares and evolution:Based on market capitalization, Microsoft leads the AI market with a share of approximately 1.7%, while Palantir's share is around 0.05%. Microsoft's dominance is attributed to its early investments in AI, including a $10 billion stake in OpenAI. Palantir, however, has seen significant stock growth, up 230% this year. Despite this, analysts expect Microsoft's stock to rise 18% over the next 12 months, compared to a 30% downside for Palantir.
3. AI-focused product offerings:Palantir and Microsoft differ in their AI focus. Palantir aggregates data for decision-making, using generative AI tools, while Microsoft emphasizes cloud infrastructure (Azure) and AI integration (Copilot). Palantir's Gotham and Foundry platforms cater to government and commercial clients, respectively, with AIP driving demand. Microsoft's Azure is the top cloud platform for AI developers, with Copilot AI agent integrated into enterprise software solutions. Microsoft's stronghold in enterprise software and early OpenAI investment support its AI growth.
4. Risks and risk management:Palantir and Microsoft face distinct risks in the AI market. Palantir's high valuation and reliance on government contracts expose it to market sentiment shifts and geopolitical instability. Its aggressive cost-cutting measures may also impact its long-term growth. Microsoft, however, has a more diversified revenue stream, with Azure and Office driving growth. Its investment in OpenAI and integration of generative AI tools pose risks, but its stronghold in enterprise software and cloud services mitigates these. Both companies' risk management strategies involve diversifying revenue streams and investing in AI to stay competitive.

5. Valuations and earnings growth:Palantir's earnings growth has been volatile, with a 5-year CAGR of 34%, while Microsoft's has been steady at 20%. Despite this, Palantir's valuation has soared, trading at 186x next year's earnings, compared to Microsoft's 27x. This suggests Palantir's stock may be overvalued, while Microsoft offers a more balanced risk-reward profile.
In conclusion, while Palantir has shown impressive AI-related revenue growth and stock performance, its high valuation and reliance on government contracts pose risks. Microsoft, with its stable and diversified business model, reasonable valuation, and stronghold in enterprise software, presents a more balanced and safer bet for long-term investors. As an investment-focused consultant, I recommend prioritizing stable, income-generating investments over speculative ventures like AI, particularly for retirement portfolios. Consider funds like the Cohen & Steers Quality Income Realty Fund (RQI), XAI Octagon Floating Rate & Alternative Income Trust (XFLT), and REITs like AWP and GOOD for their stable yields and potential for capital gains. Additionally, reliable income-generating investments like Scotiabank offer high dividends and institutional stability.
Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.