So far, the shares of Palantir Technologies(NASDAQ:PLTR) have risen 326%, while shares of Adobe(NASDAQ: ADBE) have fallen by 20%. However, choosing a stock based on its recent performance is a strategy fraught with risks. Past returns are not predictive of a stock’s growth potential.
Instead, it is wiser to analyze the stock’s business model, competitive position, risks and volatility before making any investment decisions. Based on these basics, let’s explore which of these two is a better buy.
Data mining and analytics specialist Palantir posted strong third-quarter financials, with revenue and profit easily exceeding consensus expectations. Revenue rose 30% year over year to $729 million, primarily driven by 44% growth in its US operations. Revenue from the company’s U.S. government and commercial businesses grew by 40% and 54%, respectively.
Government agencies and large enterprises primarily use Palantir’s data and analytics solutions for complex and mission-critical applications. This has helped the company build a solid customer base. In the third quarter, the number of commercial customers in the US increased 77% year-over-year to 321. The US government business also posted the strongest growth in 15 quarters.
The company’s Artificial Intelligence Platform (AIP) has also emerged as a key growth catalyst for the company. The platform uses multiple open-source and closed-source models and ontologies (frameworks that unite complex data sets from disparate sources and define their attributes and interrelationships) to help companies address fundamental challenges, such as finding ways to improve productivity and reduce costs.
Palantir’s unique go-to-market strategy has also played a crucial role in driving AIP adoption. Instead of engaging potential customers in pilot projects that can take months for customer conversion, the company is demonstrating AIP’s usefulness in solving real-time challenges through rapid “boot camps.” This has accelerated customer conversion time. In its most recent earnings call, management highlighted a number of large companies that closed deals with seven-figure annual contract values within two months of their first boot camp.
The company’s financial health has also improved at an impressive pace. The company posted an adjusted operating margin of 38% in the third quarter, its eighth straight quarter of margin expansion, and had $4.56 billion in cash on the balance sheet at the end of the quarter.
Despite the company’s many strengths, Palantir’s sky-high valuation remains a sore point for investors. It trades at 63.3 times trailing-12-month sales, much higher than the three-year average price-to-sales ratio of 23.2. In addition, the company is more exposed to government budgetary and regulatory fluctuations.
Adobe, a leading maker of creative software, also reported impressive results for the fourth quarter of 2024, which ended on November 29. Both revenue and profit exceeded consensus estimates. Compared to Palantir, however, Adobe’s revenue growth has been quite modest, up 11% year over year to $5.6 billion in the fiscal quarter. The company is highly profitable and saw non-GAAP earnings per share increase 15% year over year to $18.42.
Furthermore, the future looks bright, with remaining performance obligations (the total contracted revenue from products or services not yet delivered to customers) up 16% year-on-year to $19.96 billion.
Adobe has integrated several generative AI tools powered by the Adobe Firefly family of models (such as Imaging, Vector, Design and Video models) into its flagship products in the Creative Cloud, Document Cloud and Experience Cloud segments. At the end of the fourth quarter, Firefly generations across all its tools exceeded 16 billion. These AI capabilities help improve output quality and user control in creative content and document management.
The company also launched Adobe GenStudio, which integrates Creative Cloud, Experience Cloud and Firefly capabilities to manage scaled content creation in enterprises.
Adobe is now gearing up to further monetize its AI tools by offering new tiered subscription offers and add-ons that will help attract new users and increase average revenue per user. The company’s widespread introduction of the Firefly Video model in early 2025 will also be a big opportunity, as video generation is a higher value activity than image generation.
The company also has strong financial figures. Non-GAAP operating margin was 46.3% in the fourth quarter, and it had cash and short-term investments of $7.89 billion on the balance sheet. Yet Adobe trades at just 8.6 times revenue, much lower than the three-year average of 11.9.
Palantir is a fast-growing company that can expect significant revenue volatility with respect to deal value and volume. Adobe is a more stable company with a broader customer base and predictable subscription revenue.
Palantir is also valued at a much richer multiple than Adobe. However, the huge difference in their valuations cannot be justified solely by the differences in their respective growth rates.
Against this backdrop, Adobe seems like the investment that would better suit the needs of retail investors with a medium risk tolerance, while Palantir could be a smart choice for investors with a high degree of risk tolerance.
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Manali Pradhan has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Adobe and Palantir Technologies. The Motley Fool has a disclosure policy.
Better Artificial Intelligence Stock: Palantir or Adobe was originally published by The Motley Fool
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