Consider Swapping Palantir for These Two AI-Focused Shares as an Alternative?
Palantir's (PLTR 8.54%) shares reached an all-time high of $51.13 on November 5. This surge, amounting to a 223% year-to-date increase, is attributed to its soaring profits, escalating revenue growth, and inclusion in the S&P 500. The hype surrounding AI stocks, anticipation of reduced interest rates, and the post-election market rally contributed to its impressive gains.
It's not hard to understand why investors are bullish on Palantir. This analytics software company assists its government and commercial clients in collating data from various sources, thereby enabling them to make more informed decisions. The company projects a revenue growth of 26% this year, marking an acceleration from its 17% growth in 2023. Major contributors to this growth include new government contracts, the expansion of its U.S. commercial business, and the development of its generative AI services.
Analysts estimate Palantir's revenue and earnings per share (EPS) to grow at compound annual growth rates (CAGR) of 23% and 59%, respectively, from 2023 to 2026. However, its steep valuations with a forward earnings multiple of 186 and a sales multiple of 33 might limit its potential upward growth.
Instead of investing in Palantir's pricey stock, should investors consider Nvidia (NVDA 3.08%) and TSMC (TSM 1.32%) as their long-term AI investment options instead?
Nvidia: Still cheaper than Palantir
Nvidia is considered the backbone and bellwether of the AI market due to its dominance in producing high-end data center GPUs for AI processing tasks. Major AI companies like OpenAI, Microsoft, Alphabet's Google, and Meta Platforms rely on Nvidia's GPUs to run their AI applications.
The surge in popularity of OpenAI's ChatGPT and other generative AI applications caused numerous companies to upgrade their data centers with Nvidia's GPUs. Consequently, the demand quickly exceeded the company's supply, leading to escalated prices and margins, and an impressive surge in revenue. In fiscal 2024, Nvidia's revenue soared 126%, while its adjusted EPS increased 288%.
Nvidia faces some long-term challenges. Its top clients are developing first-party AI accelerator chips, competitors like AMD are boosting their production of cheaper data center GPUs, and its market share in China is being constricted by stricter export regulations. Besides, its major client, Super Micro Computer, is grappling with some issues following its delayed 10-K filing, an auditor's departure, and a potential regulatory probe.
Nevertheless, assuming Nvidia overcomes these hurdles, analysts expect its revenue and EPS to increase at a CAGR of 51% and 56%, respectively, from fiscal 2024 to 2027, as the AI market expands. Based on these estimates, Nvidia trades at 39 times forward earnings and 20 times next year's sales, making it a cheaper and more rapidly growing option in the AI sector compared to Palantir.
TSMC: A more balanced and diversified option
TSMC is the world's largest and most advanced contract chipmaker. It manufactures chips for "fabless" chipmakers, which outsource their production to third-party foundries such as Nvidia, AMD, and Apple.
TSMC has consistently outpaced its competitors in the "process race" to develop smaller and more dense chips over the last decade. It achieved this lead by adopting ASML's high-end lithography systems before its rivals.
TSMC reduced the size of its chipmaking nodes from 300 nanometers (nm) to 3nm between 1997 and 2022. It plans to start mass-producing 2nm chips next year.
Due to its strategic importance, TSMC is often seen as the key player in the semiconductor market. It experienced a cyclical downturn in 2023 as the PC and smartphone markets saw a decline, but it forecasts revenue growth of "almost 30%" this year due to large AI-driven orders from Nvidia, AMD, and other chipmakers.
From 2023 to 2026, analysts expect TSMC's revenue and EPS to grow at a CAGR of 25% and 28%, respectively, as it produces even more advanced and powerful chips. This is a remarkable growth rate for a stock that trades at just 18 times forward earnings and 8 times next year's sales, making it a potentially attractive AI-focused alternative to Palantir for investors seeking a more balanced growth stock.
Investors may want to consider diversifying their investments in the AI sector, given Palantir's high valuations. For instance, Nvidia, with its dominance in producing high-end GPUs for AI processing tasks, is estimated to grow its revenue and earnings per share at a compound annual growth rate of 51% and 56%, respectively, from fiscal 2024 to 2027. At these estimates, Nvidia's stock is significantly cheaper than Palantir's, trading at 39 times forward earnings and 20 times next year's sales.
Furthermore, TSMC, as the world's largest and most advanced contract chipmaker, is projected to grow its revenue and EPS at a compound annual growth rate of 25% and 28%, respectively, from 2023 to 2026. Trading at just 18 times forward earnings and 8 times next year's sales, TSMC offers a more balanced and potentially attractive AI-focused investment option for investors comparing it to Palantir.
