Palantir Technologies (PLTR 1.65%) was one of the best-performing stocks of 2024. A strong start to the year for the artificial intelligence (AI)-powered enterprise software company went into overdrive in September. A strong earnings report and its addition to the S&P 500 that month stoked a ton of buying for the stock. The market has continued to push the stock higher, bringing the company's market cap above $187 billion, as of this writing.
Palantir's financial results have been spectacular. But many analysts think the stock has gotten ahead of itself. Just three out of 22 Wall Street analysts covering the stock give it an overweight or buy rating. Moreover, none of them have a 12-month price target higher than its current stock price. Indeed, Palantir's stock valuation makes it tough to buy now.
But investors looking to add some AI stocks to their portfolio have plenty of other options. And two other companies look far more attractive than the richly valued Palantir. In fact, I predict both will be worth more than Palantir by the end of 2025, as a result of strong relative price performance to 2024's big winner.
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1. Palo Alto Networks
There are two big shifts going on that increase the demand for Palo Alto Networks' (PANW 0.63%) cybersecurity services. More and more enterprises are shifting from on-premise storage and compute for their data and software needs to cloud computing. As they migrate to the cloud or adopt a hybrid approach, they increase the number of potential attack points for cyber criminals. Additionally, most workplaces have adopted a hybrid approach to working in the office versus working from home. Again, this opens more potential security vulnerabilities.
Palo Alto offers security solutions across clients' networks (firewalls) in both hardware and software formats. It also offers solutions for the cloud and endpoint security, ensuring only authorized devices gain access to sensitive network data.
Many cybersecurity providers rely on machine learning artificial intelligence to help detect cybersecurity threats early and close vulnerabilities. One of the biggest challenges for building an effective system based on machine learning is accessing valuable data. As a leader in the space, Palo Alto has a considerable data advantage over the competition.
As such, its AI efforts pay off handsomely, as they work better than competitors. What's more, Palo Alto's capabilities make it more attractive to new customers, creating a virtuous cycle, whereby it gains access to more valuable data than its competitors.
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Key Data Points
On top of that, it's important to consider the switching costs for existing customers. Few security analysts are going to risk their job to save a few bucks for their company on a competing product. Just the opposite, they're more likely to go back to Palo Alto Networks when their needs expand. Palo Alto has been expanding its offerings through bolt-on acquisitions over time, and it's seen considerable success cross-selling customers on new products.
As the company shifts to more software-based solutions and increases its cross-selling to customers, its gross margin should continue to move higher over time. As such, investors should see profits climb considerably faster than revenue for the foreseeable future.
Palo Alto's shares currently trade for an enterprise-value-to-revenue ratio of 14.6. That's a fair price to pay. And if it can maintain that multiple through fiscal 2025, the stock should climb around 14% based on analysts' estimates. With a market capitalization of $124 billion, as of this writing, that would put its value at about $142 billion at the end of 2025. That would require Palantir stock to drop about 24% from today's price to fall below Palo Alto's potential market cap.
2. Micron Technology
When it comes to semiconductors, just a few companies get most of the attention. Most people know the big GPU makers like Nvidia. But one company making critical components of AI chips like Nvidia's is Micron Technology (MU +5.13%).
Micron supplies memory chips, including standard DRAM and NAND chips found in PCs and smartphones. It also makes chips called high-bandwidth memory (HBM), which manufacturers like Nvidia incorporate into their high-end GPUs. As a result, Micron has been a big beneficiary of the growing spending and development in artificial intelligence.
Micron's data center revenue grew more than 400% year over year in its first quarter, which ended in November. The segment, led by its HBM chips, now accounts for more than 50% of Micron's total sales.
Management is extremely optimistic about the potential for AI to transform its business. It sees the HBM market growing from $16 billion in 2024 to $100 billion by 2030. Considering just three companies, including Micron, make HBM chips, Micron is sure to see its fair share of that growth.
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The strength of the data center business can offset short-term weakness in the consumer segment. Management lowered its forecast for the second quarter due to customer inventory reductions from PC and smartphone suppliers.
The consumer segment slowdown points to the biggest risk of investing in Micron: cyclicality. Micron manufactures its own chips in-house. That requires significant capital expenditures up front, but results in relatively stable growth in cost of goods as it expands production capacity. Micron's chips are practically interchangeable with its competitors', which makes its pricing commodity-like.
In other words, when there's strong demand for Micron's chips, it sees more orders and better pricing while its cost of production remains relatively flat. When demand falls, it receives less revenue, but it's still paying the same amount, potentially resulting in negative returns on invested capital.
It seems likely Micron will continue to see very high demand for its HBM chips in 2025, as several big tech companies have laid out plans to substantially grow their data center spending. That should more than offset weakness in the consumer segment, and analysts expect 39.6% revenue growth for the year. At an enterprise-value-to-revenue ratio of 3.7 as of this writing, shares look undervalued, despite the cyclicality risk.
If shares expand their multiple to 4 over the next year, and analysts' estimates pan out, Micron would see its stock climb about 50% next year. That would put its market cap around $150 billion. A 20% drop in Palantir shares over the next year would put it below that number.
Regardless of whether Micron or Palo Alto Networks end up being worth more than Palantir by the end of 2025, both look far more attractive than the highflier at today's prices.
