Palantir’s financial results have been impressive. But many analysts believe the stock has gotten ahead of itself. Only three out of 22 Wall Street analysts covering the stock give it an overweight or buy rating. Furthermore, none of them have a 12-month target price higher than the current share price. actually, Palantir’s stock valuation makes it difficult to buy now.
But investors looking to add some AI stocks to their portfolio have plenty of other options. There are two other companies that look much more attractive than the highly valued Palantir. In fact, I expect both to be worth more than Palantir by the end of 2025, as a result of the strong relative price performance of the big winner in 2024.
Palo Alto offers security solutions across customer networks (firewalls) in hardware and software formats. It also provides cloud and endpoint security solutions, ensuring that only authorized devices have access to sensitive network data.
Many cybersecurity providers rely on machine learning AI to help detect cybersecurity threats early and close vulnerabilities. One of the biggest challenges in building an effective machine learning system is access to valuable data. As an industry leader, Palo Alto has a big data advantage over competitors.
As such, its AI efforts are paying off well, as it performs better than competitors. Furthermore, Palo Alto’s capabilities make it more attractive to new customers, creating a virtuous circle, where it has access to more valuable data than its competitors.
Furthermore, it is important to consider switching costs for existing customers. Few security analysts would risk their jobs to save their company a few dollars on a competing product. Quite the contrary, they are more likely to return to Palo Alto Networks when their needs expand. The Palo Alto company has been expanding its offerings through additional acquisitions over time, and has seen significant success cross-selling to customers on new products.
As the company transitions to more software-based solutions and increases its cross-sell to customers, gross margin should continue to rise over time. As such, investors should see earnings rising much faster than revenues for the foreseeable future.
Palo Alto stock currently trades for a value to enterprise revenue ratio of 14.6. This is a fair price to pay. If it can maintain this multiple through fiscal 2025, the stock should rise about 14% based on analyst estimates. With a market cap of $124 billion, as of this writing, that would put its value at about $142 billion at the end of 2025. This would require Palantir stock to fall about 24% from today’s price to fall below the company’s potential market cap. Palo Alto.
When it comes to semiconductors, only a few companies get most of the attention. Most people know that the big GPU makers love this Nvidia. But one company that makes critical components of AI chips, like Nvidia, is doing just that Micron technology (NASDAQ: MU).
Micron provides memory chips, including the standard DRAM and NAND chips found in computers and smartphones. It also makes chips called high-bandwidth memory (HBM), which manufacturers like Nvidia integrate into their high-end GPUs. As a result, Micron has become a major beneficiary of increased spending and development in AI.
Micron’s data center revenue grew more than 400% year over year in the first quarter that ended in November. This segment, led by HBM chips, now represents more than 50% of Micron’s total sales.
Management is very 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 only three companies, including Micron, make HBM chips, Micron is sure to get its fair share of that growth.
Strength in the data center business could offset short-term weakness in the consumer sector. Management lowered its forecast for the second quarter due to lower customer inventory from computer and smartphone suppliers.
The consumer sector slowdown points to the biggest risk of investing in Micron: cyclicality. Micron manufactures its own chips in-house. This requires large upfront capital expenditures, but results in relatively stable growth in the cost of goods as production capacity expands. Micron’s chips are practically interchangeable with those of its competitors, making their pricing more like commodities.
In other words, when there is strong demand for micron chips, they see more orders and better prices while their cost of production remains relatively constant. When demand declines, it receives less revenue, but still pays the same amount, which can result in negative returns on invested capital.
It seems likely that Micron will continue to see very high demand for its HBM chips in 2025, as several major technology companies have made plans to significantly increase their data center spending. This should offset weakness in the consumer sector, and analysts expect revenue growth of 39.6% for the year. At an enterprise value-to-revenue ratio of 3.7 as of this writing, shares appear undervalued, despite cyclicality risks.
If shares expand multiples to 4 over the next year and analyst estimates come true, Micron will see its shares rise about 50% next year. This would put its market value at around $150 billion. A 20% decline 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 much more attractive than high-flying companies at today’s prices.
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Adam Levy He has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool recommends Palo Alto Networks. The Motley Fool has Disclosure policy.
Prediction: Two artificial intelligence (AI) stocks that will be worth more than Palantir by the end of 2025 Originally published by The Motley Fool
