The artificial intelligence (AI) sector has seen significant growth in recent years, and investors have been looking for opportunities to capitalize on this trend. Among the various ways to invest in AI, two of the most popular options are Nvidia and Palantir. While both companies operate in the AI space, they have distinct business models and attributes. So, which one is the better buy? Let’s take a closer look.
Nvidia is primarily a hardware company, known for its graphics processing units (GPUs) that are widely used for AI computing. Nvidia’s GPUs are highly regarded and are considered best-in-class for AI applications. As a hardware company, Nvidia’s revenue is dependent on selling more GPUs. If demand for GPUs declines, the company’s revenue could suffer.
On the other hand, Palantir is a software company that specializes in data analytics. Originally designed for government use, Palantir’s software has expanded into commercial applications as well. Its software is highly adaptable and can be tailored to meet the needs of various industries. Palantir’s revenue model relies on customers renewing their licenses within a specific time frame, often on an annual or monthly basis.
While both companies operate in the AI space, their revenue types are quite different. Nvidia’s revenue is not recurring, as it relies on hardware sales. In contrast, Palantir’s software model requires customers to renew their licenses, providing a more predictable revenue stream. In the event of a recession, Nvidia’s revenue streams could be affected if customers delay projects. Meanwhile, Palantir’s integrated software solutions make it more likely for customers to continue paying for its products.
In terms of growth, Nvidia has outperformed Palantir. In the third quarter of fiscal year 2024, Nvidia’s revenue grew by an impressive 206% compared to Palantir’s growth of 20% in the fourth quarter of fiscal year 2023. While Palantir’s growth rate is respectable for a software company, Nvidia’s rapid expansion sets it apart.
Both companies have demonstrated profitability, which is not always the case for growth companies. Palantir has consistently posted profit margins in recent years, with a 15% margin in the fourth quarter of fiscal year 2023. However, Nvidia’s profit margins are far superior due to its mature business.
Valuation is another aspect to consider when comparing these two companies. Using traditional metrics like the price-to-earnings (P/E) ratio is challenging for Palantir, as it hasn’t reached maximum profitability yet. Therefore, a revenue-based measure like the price-to-sales (P/S) ratio is often used to assess Palantir’s valuation. At 25 times sales, Palantir is considered quite expensive compared to its peers.
Nvidia’s P/E ratio is relatively high, trading at nearly 100 times earnings. However, when forward earnings are taken into account, which factor in expected growth over the next 12 months, Nvidia appears less expensive at 35 times forward earnings. This valuation aligns more closely with peers like Microsoft and Apple.
Given all these factors, it’s challenging to directly compare Nvidia and Palantir. While Nvidia emerges as the better buy based on the analysis, Palantir’s unique revenue model could prove advantageous if Nvidia faces a demand slump. As of now, Nvidia appears to be the more favorable choice.
Investors should conduct their own research and consider their risk tolerance and investment goals before making any investment decisions. It’s also worth noting that the AI sector is highly dynamic, and market conditions can change rapidly.
