There may not be a hotter stock on Wall Street right now than Palantir Technologies. The company's artificial intelligence (AI) software is revving its growth engine, and there is a wide-open market opportunity in both government and the private sector. The stock is up approximately 800% since the start of last year.
Be warned. Momentum can sometimes take stock prices to irrational places, and Palantir's valuation has arguably become untenable at more than 50 times the company's revenue.
There might be a better AI stock to buy right now. ASML(NASDAQ: ASML) plays a vital role in producing the cutting-edge chips that power AI technology. However, the company's geopolitical woes have suppressed the share price, creating a buying opportunity for long-term investors.
Here is what you need to know.
Palantir's euphoric price action is a warning sign
There's a difference between a company and its stock. Palantir is making a convincing argument that it's a fantastic business. Its data analytics software has become increasingly widespread among government and enterprise customers, and its AIP platform, which helps companies deploy AI applications, has ignited its growth. Palantir's revenue grew 30% year over year in the third quarter, a continued acceleration that excited investors about the company's future.
But as I said above, the stock has multiplied from where it was just under two years ago. In fact, on a price-to-sales basis, the stock is more expensive today than during the "Everything Bubble" of 2021, a stock market bubble born from zero-interest-rate fiscal policy following the COVID-19 pandemic:
PLTR PS Ratio data by YCharts
This will probably not end well. Stocks generally don't maintain sky-high valuations like this, and it will take either years of the stock going nowhere or a dramatic decline to make Palantir's valuation sensible again. In other words, this is not the stock you want to put fresh money into right now.
ASML is a millionaire-making stock on the decline. Why buy?
On the other hand, ASML has headed in the opposite direction since the stock peaked in July. ASML designs and manufactures specialty equipment, called lithography machines, to produce semiconductors (chips). It's a key cog in the technology supply chain because it's the only company that makes extreme ultraviolet lithography (EUV) machines required to produce high-end chips, like those used in data centers for AI.
ASML's dominance in lithography has helped the stock produce mind-blowing investment returns. The stock's total returns surpass 31,000% since the mid-1990s, easily outrunning the S&P 500. Long-time investors in ASML stock have probably enjoyed life-changing wealth, perhaps even becoming millionaires.
So, why has this fantastic stock declined nearly 40% from its high?
The Dutch company has become a victim of geopolitical tensions between China and the United States. China is ASML's core market, representing nearly half of total revenue in Q3. The United States is pressuring ASML to restrict its business with China for national security reasons. These concerns were legitimized by Q3 earnings when ASML lowered its 2025 revenue guidance from its prior range of 30 billion to 40 billion euros to 30 billion to 35 billion euros.
Why the stock is a buy today
The geopolitical fears have merit, and Q3 earnings showed that the tensions are already impacting the business. However, the situation seems more like temporary turbulence than permanent damage.
Why? Because it's unlikely that these political tensions will last forever.
ASML is the most valuable company in the Netherlands. Will the Dutch government allow ASML to implode over political posturing between other countries? It could, but I wouldn't make that bet. Remember, ASML has a monopoly on EUV machines. As long as global demand for chips rises over time, ASML has a good shot at realizing those growth opportunities, by selling either to China or wherever that manufacturing winds up.
Meanwhile, the stock trades at a price-to-earnings (P/E) ratio of 32, below its 10-year average of 37. Few dominant companies trade at a discount to their historical norms in today's market. The stock isn't a sure thing while the geopolitical waters remain choppy, but it looks far safer than Palantir, which has essentially turned into a bubble at these prices.
Don’t miss this second chance at a potentially lucrative opportunity
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*Stock Advisor returns as of November 11, 2024
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Palantir Technologies. The Motley Fool has a disclosure policy.
