Forget Palantir: This AI Stock Has a Better Setup
Palantir just crushed earnings and sent its stock soaring, but one veteran investor sees a crowded trade with a dangerous bar to clear and a quieter AI giant with a far more forgiving setup waiting in the wings.
Palantir (NASDAQ:PLTR | PLTR Price Prediction) is dominating AI headlines after posting 92.8% revenue growth last quarter and raising its full-year guidance again.
The valuation and the timing deserve a closer look.
Below I’ll lay out why Palantir has become a crowded trade with a very high bar to clear, and which AI giant gives retirement investors a better starting point right now.
Why Palantir Needs a Perfect Quarter
Palantir has earned the attention. Second-quarter revenue reached $1.94B, and EPS of $0.41 beat estimates of $0.28. That made nine consecutive quarters of beats. CEO Alex Karp called the quarter “otherworldly.”
The price is my problem. Shares sat at $197.34 premarket, up 11% this year. The stock trades at a trailing P/E of 281 and about 218 times free cash flow, for a free cash flow yield of 0.46%. Buyers today are paying for profits that are still years away.
Dilution adds to the cost. Stock-based compensation came to $265M in Q2, up from $201.6M in Q1. Customer contracts also include termination-for-convenience clauses, and much of the revenue depends on U.S. government budgets.
Then there’s the crowd. Rosenblatt told clients to buy Palantir ahead of earnings. The third-quarter report is expected on November 2 after the close, though the company hasn’t confirmed the date. When everyone agrees going into a report, even a strong quarter can fall short of what’s already in the price. I’ve seen this movie before.
Alphabet Offers Patient Money a Better Setup
I’d rather put my research time into Alphabet (NASDAQ:GOOGL). I’ve owned it since April 2012, and the last two quarters are the strongest case for the AI story that I’ve seen from the company. I see three reasons.
- Valuation. Alphabet trades at a trailing P/E of 14, compared with 281 for Palantir. That multiple looks cheaper than it really is, because Q2 net income included a $99.03 billion gain on equity securities. Even after you allow for that, the gap between the two is enormous.
- Growth at scale. Total revenue rose 24% to $119.8 billion. Google Cloud grew 82%, and its backlog stood at over $460 billion as of Q1. Search, which many expected AI to hurt, grew 17%.
- Gemini as the catalyst. The Gemini App has 950 million monthly active users, and nearly 90% of the Fortune 100 use Gemini Enterprise. CEO Sundar Pichai said its “differentiated, full stack approach to AI is delivering real, measurable value.”
Every company has to become a tech company or it fails, and Alphabet is on both sides of that shift: it sells AI tools and puts them in front of billions of users. Meanwhile, the stock is down 6% over the past month and up only about 4% this year. Reddit sentiment is neutral and activity is low. The crowd’s attention is somewhere else.
One Risk I Won’t Ignore
The spending is huge. Capex hit $44.92 billion in Q2, which drove free cash flow to -$5.855 billion. Alphabet also suspended buybacks and raised about $70 billion in equity and debt. If AI demand cools, all that new infrastructure becomes a burden. All that expansion also has to be powered, cooled, and connected by someone, and we put seven of the suppliers riding that wave into a free report.
My Verdict on Palantir Versus Alphabet
Palantir is a great business priced like a sure thing, and everyone is piling in before its report. Alphabet is growing its AI businesses fast at a fraction of the multiple, with far fewer people paying attention. If you think AI profits will flow to the companies that own the models, the cloud and the users, Alphabet belongs at the top of your research list ahead of Palantir’s expected November 2 report.
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I've been writing about stocks and personal finance for 20+ years. I believe all great companies are tech companies in the long run, and I invest accordingly.
