Palantir’s financial results were spectacular. But many analysts think the stock has outpaced itself. Only three of the 22 Wall Street analysts covering the stock give it an overweight or buy rating. Furthermore, none of them have a twelve-month price target higher than the current share price. Palantir’s stock valuation makes it difficult to buy now.
But investors looking to add AI stocks to their portfolio have plenty of other options. And two other companies look much more attractive than the highly valued Palantir. In fact, I predict that both will be worth more than Palantir by the end of 2025, due to strong relative price performance versus the big winner of 2024.
Palo Alto offers security solutions for customers’ networks (firewalls) in both hardware and software formats. It also provides cloud and endpoint security solutions so that only authorized devices can access sensitive network data.
Many cybersecurity providers rely on machine learning artificial intelligence to detect cybersecurity threats early and close vulnerabilities. One of the biggest challenges in building an effective machine learning system is gaining access to valuable data. As a leader in this space, Palo Alto has a significant data advantage over the competition.
As such, AI efforts are paying off as they work better than competitors. Additionally, Palo Alto’s capabilities make it more attractive to new customers, creating a virtuous cycle that gives the company access to more valuable data than its competitors.
In addition, it is important to take into account the switching costs for existing customers. Few security analysts will risk their jobs to save their company a few dollars on a competing product. On the contrary, they are more likely to return to Palo Alto Networks as their needs increase. Palo Alto has expanded its offerings over time through additional acquisitions and has achieved significant success in cross-selling new products to customers.
As the company shifts to more software-based solutions and increases cross-selling to customers, gross margin should continue to increase over time. As such, investors should see profits rise significantly faster than revenues for the foreseeable future.
Palo Alto stock currently trades at an enterprise value-to-revenue ratio of 14.6. That’s a fair price to pay. And if it can maintain this figure through fiscal 2025, the stock should rise about 14% based on analyst estimates. With a market capitalization of $124 billion at the time of writing, its value would be around $142 billion at the end of 2025. That would mean Palantir’s shares would have to fall about 24% from their current price to fall below Palo Alto’s potential market cap.
When it comes to semiconductors, only a few companies get the most attention. Most people know the big GPU makers Nvidia. But one company that makes crucial components of AI chips, like Nvidia’s, is Micron technology (NASDAQ:MU).
Micron supplies memory chips, including standard DRAM and NAND chips found in PCs and smartphones. It also makes chips called high-bandwidth memory (HBM), which manufacturers like Nvidia integrate into their high-end GPUs. As a result, Micron has been a major beneficiary of the growing spending and development in artificial intelligence.
Micron’s data center revenue grew more than 400% year over year in the first quarter ended in November. The segment, led by its HBM chips, now accounts for more than 50% of Micron’s total sales.
Management is extremely optimistic about AI’s potential to transform its business. It sees the HBM market growing from $16 billion in 2024 to $100 billion in 2030. With only three companies, including Micron, making HBM chips, Micron will certainly see a large portion of that growth.
The strength of the data center business can offset near-term weakness in the consumer segment. Management lowered its second-quarter forecast due to customer inventory reductions at PC and smartphone suppliers.
The slowdown in the consumer segment points to the biggest risk of investing in Micron: cyclicality. Micron produces its own chips in-house. This requires significant upfront capital expenditure, but results in relatively stable growth in commodity costs as production capacity increases. Micron’s chips are virtually interchangeable with those of the competition, making the price comparable to that of regular products.
In other words, when there is strong demand for Micron’s chips, the company sees more orders and better prices, while production costs remain relatively flat. When demand falls, it receives less revenue but still pays the same amount, potentially resulting in a negative return on invested capital.
It seems likely that Micron will continue to see very strong demand for its HBM chips into 2025, as several major technology companies have laid out plans to substantially grow their data center spending. That should more than offset weakness in the consumer segment, with analysts expecting revenue growth of 39.6% this year. With an enterprise value/revenue ratio of 3.7 at the time of writing, the shares appear undervalued, despite the cyclicality risk.
If the stock expands its multiple to 4 over the next year, and analyst estimates come true, Micron could see its stock rise about 50% next year. That would bring its market cap to about $150 billion. A 20% decline in Palantir shares over the next year would put it below that number.
Regardless of whether Micron or Palo Alto Networks will ultimately be worth more than Palantir by the end of 2025, both look much more attractive than the high flyer at current prices.
Consider the following before purchasing shares in Micron Technology:
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Nvidia and Palantir Technologies. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
Prediction: 2 Artificial Intelligence (AI) Stocks That Will Be Worth More Than Palantir by the End of 2025 was originally published by The Motley Fool
