Micron technology (NASDAQ:MU) And Palantir Technologies (NASDAQ:PLTR) are two of the hottest stocks in artificial intelligence (AI). Both companies are generating phenomenal revenue and profit growth as demand for their products soars, thanks to advances in AI. And the market is not letting this go unnoticed.
Despite the 2026 decline in software stocks, Palantir’s stock price is up more than 96% in the past year and 1,990% in the past three years. And Micron shares have continued to rise through 2026, with the stock now up 349% over the past year. The market now values Palantir at $367 billion and Micron at $452 billion, making them two of the largest companies in the world.
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But another AI stock may be undervalued by the market right now. And despite its market cap being closer to $320 billion, I predict it will be worth more than both Micron and Palantir next year.
There’s no denying that both Micron and Palantir are currently posting excellent financial results. The biggest problem facing both companies is valuation.
At first glance, Micron’s price-to-earnings ratio of 11.1 might seem like an incredible bargain. The memory chip manufacturer is expected to see earnings per share quadruple in the current financial year. Analysts expect even more growth next year.
But it’s important to understand what drives Micron’s results. The sudden increase in profits stems from the growing demand for high-bandwidth memory chips. As demand grows, Micron and the other memory chip makers have reallocated capacity to meet it, but they have been slow to build new capacity.
As a result, memory chip prices have increased, increasing profits and margins. Price increases can also artificially inflate demand from buyers who prioritize additional price increases, further exacerbating the short-term imbalance. Micron management expects supply constraints to remain until 2027.
However, as more capacity becomes available and the balance between supply and demand normalizes, prices will return to normal levels. With the additional costs of the new capacity, operating costs will remain high. Margins will shrink and profits will decline. This is the cyclical nature of the semiconductor industry, but is especially evident in the market for commodity-like memory chips.
Micron’s price-to-earnings ratio has fallen into the low single digits at the height of its earnings cycles. Based on historical data, investors expect the current earnings cycle to continue well beyond 2028, even as management suggests supply will regain balance with demand by the end of next year.
Meanwhile, Palantir’s price-to-earnings ratio of 118 and price-to-sales ratio of 90 are difficult to accept. Even though the company achieved revenue growth of 70% last quarter and 56% for the year, with improving operating margins, this valuation implies that the incredible earnings growth will continue in the coming years.
Analysts currently expect earnings per share growth to exceed 40% in both 2027 and 2028. But even with these lofty expectations, shares trade at 60 times 2028 earnings forecasts. At current valuations, a small disappointment could send shares tumbling.
As such, investors shouldn’t expect the recent returns they’ve seen in Micron and Palantir stocks to continue given their current valuations. I predict that both will have a market cap of around $400 billion, if not lower, by the end of 2027.
Meanwhile, another AI stock’s valuation could soar well above $400 billion next year.
Despite a sharp sell-off in stocks over the past few months, investors may have an incredible opportunity to buy shares of an AI cloud computing giant at an exceptional value. Alibaba.com (NYSE: BABA) may face competitive pressure and geopolitical risks, but the current valuation more than accounts for these. With a market cap of around $320 billion, it has a significant advantage as of now.
Alibaba has seen its revenues decline significantly as it invests in both its retail and cloud computing businesses. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) fell 78% year over year in the second quarter ended in September.
On the retail side, sales grew by a respectable 16% last quarter. However, profits were under pressure due to the emphasis on ‘fast trading’, i.e. delivering items within an hour of a customer’s order. The company needs significant scale to operate profitably, and Alibaba is spending heavily to promote it to customers and bring on board additional suppliers and brands.
Unit economics improved last quarter and management says it has continued to improve since September. With fast trading turning margin neutral, Alibaba should see a sharp recovery in its retail profits.
Meanwhile, the opportunities in cloud computing remain enormous. Revenue for the cloud division accelerated to 34% last quarter, driven by increasing adoption of Alibaba’s AI products. AI services are growing particularly quickly, with three figures.
However, to support that growth, Alibaba is investing heavily in AI development and training to continue attracting more customers with its Qwen models. The country is also spending heavily on infrastructure to support growing demand.
Alibaba’s stock trades for just 21 times forward earnings estimates, which is a very attractive valuation for a company that is expected to grow earnings per share at a solid double-digit pace over the next two years after it recovers from the current investment cycle. That price more than accounts for the risk of investing in China, and I expect that multiple to increase in the coming years, pushing Alibaba’s market cap above $400 billion next year.
Consider the following before buying shares in Alibaba Group:
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Micron Technology and Palantir Technologies. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
Prediction: 1 Artificial Intelligence (AI) Stock That Will Be Worth More Than Micron and Palantir by 2027 was originally published by The Motley Fool
