It has been an excellent year for stock market investors. The S&P500 The index has delivered an excellent 26% return so far in 2024, driven by resilient macroeconomic conditions, record corporate profits and growing optimism about the transformative potential of artificial intelligence (AI) across the economy.
Palantir Technologies (PLTR 1.56%) And International business machines (IBM 0.22%) are leaders in the technology sector capturing strong demand for innovative AI applications, sending the two stocks to all-time highs. Can the rally continue in 2025?
Let’s discuss whether Palantir or IBM is the better buy right now.
Image source: Getty Images.
The case for Palantir
Palantir Technologies has quickly become one of the hottest growth stocks on the market, up 288% year-to-date at the time of writing. The company has found success in leveraging AI with big data analytics for commercial applications beyond its traditional government sector focus.
Palantir’s Artificial Intelligence Platform (AIP) connects data management tools to predictive and actionable insights for organizations across many industries. The ability to automate tasks and create custom workflows that increase productivity has proven to be very popular.
In the third quarter (for the period ending September 30), Palantir’s total revenue rose 30% year over year, with U.S. commercial segment growth rising at an even stronger annual rate of 54%. That expansion has translated into sharply higher profits, as net profit more than doubled compared to last year. The company’s management exudes confidence that the trends will continue into 2025 and beyond.
Ultimately, the best reason to buy Palantir stock is its exceptional growth prospects, which are unparalleled in size in AI enterprise applications. Investors who believe the company is still in the early stages of long-term global opportunities may want to consider adding the stock to a diversified portfolio.
The case for IBM
If Palantir is the tech breakout star of 2024, IBM has been the steady winner, with shares up 37% year to date. The appeal of IBM today as an investment is its diversified technology profile. The company has shifted its focus from infrastructure hardware to AI-powered hybrid cloud solutions through multiple software offerings. In applications, IBM’s Watsonx.ai platform has been a growth engine, working for large organizations to implement generative AI and machine learning into business processes.
The good news is that during the third quarter (for the period ending September 30), IBM’s software segment revenue increased 10% year-over-year, with management noting that its generative AI business book grew by $1 billion compared to the second quarter. . For context, that’s more than the $726 million in total revenue Palantir generated during the same period.
However, given IBM’s much larger size, it will take more to move the entire company. The company’s total third-quarter revenue grew just 1% year-over-year, driven by continued weakness in the company’s legacy infrastructure segment. Adjusted earnings per share (EPS) increased by a modest 5% compared to the third quarter of 2023.
So while IBM doesn’t have the explosive momentum as Palantir, the main benefit for investors is an attractive valuation. Based on analyst estimates, IBM shares trade at 22 times consensus full-year EPS as a price-to-earnings (P/E) ratio, a deep discount to Palantir’s eye-popping forward P/E of 176.
IBM PE Ratio (Forward) data by YCharts
In this case, the market has lifted Palantir stock to an extreme earnings premium by pricing out many of the positives in the outlook. That dynamic doesn’t necessarily mean the stock should be sold, but it does add a layer of risk for investors to weigh against high expectations of where things could go wrong. In contrast, IBM generates steady growth through a more mature global footprint.
Investors looking for a bargain among artificial intelligence stocks should choose IBM, as the company trades at more modest valuation multiples and offers a regular quarterly dividend of 3%.
Decision point: I am optimistic about IBM
As strong as Palantir Technologies’ trends have been, the stock is simply too expensive for me to buy with conviction after the massive rally. IBM is likely the better stock for most investors to gain exposure to operational AI and enterprise machine learning application themes, with a combination of good value and quality fundamentals. In my opinion, IBM shares should continue to reward shareholders within a diversified portfolio.
Dan Victor has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Palantir Technologies. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.
