Palantir vs. Super Micro Computer: Which S&P 500 Stock is a Better Buy?

The S&P 500 Index ($SPX) is among the most popular equity indices in the world. It provides you with exposure to roughly 500 of the largest companies in the U.S., which are weighted on the basis of market cap. 

The S&P 500 index is rebalanced each quarter or four times a year. In 2024, artificial intelligence (AI)-fueled tech stocks, including Super Micro Computer (SMCI) and Palantir Technologies (PLTR), were among the new entries to the flagship index. While both of these companies crushed the broader market's returns in 2023, they have experienced sharply contrasting fortunes in recent months.

With a market cap of $134.9 billion, Palantir trades near all-time highs, while SMCI stock now has plunged more than 80% from its record levels set in March. With investor sentiment nearing polar extremes on both PLTR and SMCI, which S&P 500 stock is a better buy at its current valuation? 

Is Super Micro Computer Stock Undervalued?

Shares of Super Micro Computer rallied roughly 1,400% between January 2023 and March 2024. The server maker has since tumbled more than 80% in the last eight months, burning massive investor wealth in the process.

Initially, investors were worried over Super Micro Computer’s falling gross margins due to rising competition from hardware peers such as Dell(DELL) and Hewlett-Packard Enterprise (HPE). Then, in August, short seller Hindenburg Research accused Super Micro of accounting fraud - which investors were willing to shrug off, until SMCI management said it was delaying its 10-K filing for fiscal 2024. 

Amid reports of an investigation by the Department of Justice, Super Micro’s auditor, Ernst & Young, resigned last week, and explained it was “unwilling to be associated” with the company’s murky financial statements. This coincides with reports that key customer Nvidia (NVDA) is now seeking alternatives to Super Micro to avoid potential supply chain disruptions.

On one hand, the drawdown in SMCI stock provides an opportunity to buy a growth stock at an extremely cheap multiple. In fiscal 2024 (which ended in June), Super Micro increased sales by 109.8% year over year to $14.9 billion. However, its gross profit margins narrowed to 14.1% from 18% in fiscal 2023. 

Analysts tracking SMCI expect its earnings to expand from $2.21 per share in fiscal 2024 to $3.34 per share in 2025. Priced at 7x forward earnings, SMCI stock is dirt cheap, given its growth forecasts. 

However, Super Micro may be delisted from the Nasdaq exchange if the company fails to file its 10-K or submit a plan to regain listing compliance by the end of this week. Given the stock has already been delisted once before over similar issues, this would seem to be a very real possibility. 

Many SMCI stock bulls have grown more cautious recently, with the consensus rating among 12 analysts now at a “Hold," down from a “Moderate Buy” one month ago.

Is Palantir Stock Overvalued?

Palantir stock has gained 248% year-to-date, driven by expanding profit margins and strong revenue growth. In Q3 of 2024, its sales rose by 30%, while an asset-light balance sheet allowed it to grow operating margins by 36% year over year. 

Over the years, Palantir has focused on providing a differentiated product experience to customers, resulting in higher retention rates and lower marketing expenses. For instance, its sales and marketing expenses in Q3 rose by less than 19% compared to the year-ago period. 

Palantir ended the quarter with a net retention rate of 118%, which means existing customers increased spending by 18% over the past 12 months. The company said it closed over 100 deals worth more than $1 million in annual sales, a key metric. Another notable growth metric for Palantir is its free cash flow of $980.3 million in the last four quarters, up from $697 million in 2023 and $183.7 million in 2022. 

During its earnings call, Palantir forecast Q4 revenue between $767 million and $771 million, higher than consensus estimates of $741.4 million. Palantir explained that its financial performance exceeds expectations due to “unwavering demand” from government and commercial customers for its AI-powered technologies. 

Priced at 125x forward earnings, PLTR stock is forecast to end 2028 with adjusted earnings of $2.50 per share. So, if the stock trades at 50x forward earnings, it will be priced around $125 in three years, up from its current price of $60.24. 

PLTR also has a consensus “hold” rating from analysts, and trades at a premium to even its Street-high target price of $57. 

The Bottom Line

While SMCI may be appealing to bargain-hunting speculators who can stomach the heightened risk, the software company's robust revenue growth and promising long-term prospects suggest that PLTR may be the better pick - though investors may want to wait for a dip to start accumulating shares.