Artificial intelligence (AI) platforms bring together the software tools needed to develop, deploy, and evaluate AI models and applications. Spending on AI platform services is expected to increase rapidly, so much so that they "will be the fastest growing technology in the years to come," according to IDC analyst Andrea Minonne.
Palantir Technologies(NYSE: PLTR) and Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) should both benefit from that trend. But Wall Street expects the stocks to move in opposite directions over the next year, as detailed below:
- Palantir has a median 12-month price target of $28 per share. That forecast implies 37% downside from its current share price of $45.
- Alphabet has a median 12-month price target of $205 per share. That forecast implies 24% upside from its current share price of $165.
In short, most Wall Street analysts expect Palantir stock to decline during the next year, and they expect Alphabet stock to climb higher. Here are the important details.
Palantir: 37% implied downside
Palantir sells analytics software to commercial and government customers. Its primary platforms, Foundry and Gotham, let businesses capture data, develop models, and surface insights with analytical applications. Its adjacent AIP (Artificial Intelligence Platform) product brings natural language processing capabilities to Foundry and Gotham, which lets businesses apply generative AI to their operations.
In August, Forrester Research recognized Palantir a leader in artificial intelligence and machine learning (ML) platforms. The report highlighted strong capabilities in data ingestion and preparation, and an intuitive user interface, as reasons why "Palantir is quietly becoming one of the largest players in this market." In September, Palantir was a top-ranked vendor in Dresner Advisory Services' report on model operations, a discipline that deals with the development, deployment, and maintenance of analytical models.
Palantir continued to build momentum in the second quarter. Its customer count rose 41%, and the average existing customer spent 14% more. In turn, revenue rose 27% to $678 million, and non-GAAP earnings increased 80% to $0.09 per diluted share. Importantly, the company touted the success of its go-to-market strategy with AIP, which uses interactive workshops called bootcamps to engage prospective clients.
Palantir's business is fundamentally solid. It has a strong competitive position in an industry projected to grow quickly, and it is executing on that opportunity. But the stock has a serious drawback in its price tag. Wall Street expects Palantir's adjusted earnings to increase at 22% annually over the next 12 months. That makes the current valuation of 140 times adjusted earnings look utterly absurd.
In late September, when Palantir traded at $37 per share, it was the most overvalued stock in the S&P 500 in terms of the discrepancy between its current price and the median target price. But the market is not always rational. Palantir shares have since climbed to $45, and may climb even higher. But investors should steer clear. Unless earnings grow much faster than anticipated, Palantir stock will almost certainly suffer a sharp correction at some point.
Alphabet: 24% implied upside
Alphabet primarily generates revenue through its Google operating segment, though its autonomous driving subsidiary Waymo could one day be a meaningful growth driver. In June, Forrester Research ranked Google as a leader in foundational large language models shortly after the company released Gemini, a family of models that have been integrated across its advertising and cloud computing ecosystems.
In advertising, Gemini surfaces AI overviews in Google Search. CEO Sundar Pichai says that innovation has boosted usage and satisfaction, especially among young adults aged 18 to 24. Gemini also powers AI features in Google Ads that streamline creative asset production and campaign planning. Google already dominates the digital advertising market with 27% revenue share, but those tools could further cement its leadership.
In cloud computing, Forrester Research recently recognized Google as a leader in AI/ML platforms. Palantir received higher scores for its current offering, but Google scored higher for its growth strategy. The company has introduced more than 500 updates for Vertex AI (its AI/ML platform) since 2023, including the ability fine-tune Gemini models and build custom generative AI applications.
Alphabet reported encouraging financial results in the second quarter. Revenue rose 14% to $84.7 billion on strong sales growth in cloud services and modest growth in advertising. Meanwhile, GAAP earnings rose 31% to $1.89 per diluted share. "Year to date, our AI infrastructure and generative AI solutions for cloud customers have already generated billions in revenues, and are being used by more than 2 million developers," Sundar Pichai told analysts.
As a caveat, there is regulatory risk associated with Alphabet stock because a federal judge recently ruled Google engaged in illegal practices to maintain its monopoly in search. But most analysts are still bullish. Indeed, Wall Street estimates Alphabet's earnings will grow 16% over the next 12 months. That makes the current valuation of 24 times earnings look reasonable. Investors should feel comfortable buying a small position at the current price.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Palantir Technologies. The Motley Fool has positions in and recommends Alphabet and Palantir Technologies. The Motley Fool has a disclosure policy.
