Let’s put these two AI narrative stocks to the test.
It seems like any stock related to artificial intelligence (AI) has soared recently. There are no two better examples than Super Micro Computer (SMCI -0.08%) and Palantir (PLTR -1.22%), whose stocks were at one point both up over 100% this year. Investors are enamored with the booming spending across the technology industry to support growth for AI software tools, hoping to ride the wave of one of the next big technology trends. Analysts expect cloud computing revenue to reach $2 trillion in spending by 2030, which should help revenue growth for a lot of these AI companies.
Both Super Micro Computer and Palantir have been labeled AI stocks, but that doesn’t necessarily mean they are great investments. Which is the better buy today: Palantir or Super Micro Computer stock? Let’s take a closer look and find out.
Palantir: Better profit margins
Palantir makes analytical software for large businesses and the United States government, mainly the military and intelligence agencies. It rose to prominence by embracing a role as a software defense contractor while most of the tech industry shied away from working with the government. This decision has paid off handsomely for the company.
Last quarter, overall sales grew 27% year over year to $678 million. U.S. commercial revenue — sales to businesses in the United States — grew 55% to $159 million. The company is succeeding mightily in bringing its analytics and AI platform from the government to private businesses, which is a much larger market opportunity.
As a software company, Palantir has best-in-class gross margins above 80%. This has enabled the company to expand its operating margin to around 12% over the past 12 months and 16% last quarter. As we will see, looking at Super Micro Computer can’t compete with Palantir when it comes to the unit economics of its business.
Valuation is a different story. Palantir’s stock has ripped 372% higher since going public in 2021. While its revenue and profitability have improved, it has not kept up with the share price appreciation. Today, the stock trades at a record-high price-to-sales ratio (P/S) of 43. Not earnings, sales. No matter how you slice it, no matter how high of a margin a business has, this is a nosebleed valuation ratio. Anyone considering buying Palantir stock at these levels needs to think about this.
Super Micro Computer: Faster growth
One of the fastest-growing companies in the world is Super Micro Computer. The builder of data centers for AI and cloud providers grew revenue by an astonishing 143% year over year last quarter to $5.3 billion as it saw high demand from customers. For the full fiscal year 2024 — which ended last quarter — the company generated $14.9 billion in sales.
However, given that Super Micro Computer is a reseller of computing products, its revenue comes with low gross margins. In fact, the gross profit margin was just 14.3% over the past 12 months, which is lower than Palantir’s operating margin. Even though it generates a much higher sales figure every quarter, Super Micro Computer’s gross profit was barely higher than Palantir’s last quarter, at $596 million vs. $550 million.
Another concern for Super Micro Computer is a big short report from Hindenburg Research that was released around two months ago. The report alleges circular accounting methods (i.e., faking revenue), self-dealing, and undisclosed related party transactions. None of these allegations have been confirmed, but auditor Ernst and Young just resigned, saying it had little confidence in the company’s financial statements, which is clearly not a good thing.
Super Micro Computer’s stock has collapsed due to this short report and auditor resignation, leading its price-to-earnings ratio (P/E) to fall to 13. This is a much lower earnings multiple than Palantir, which trades at a P/E of over 200. Investors are concerned that Super Micro Computer will have to restate its financial statements because it used bad accounting practices, which might mean those earnings are not as high as we think.
Which is the better buy?
It is tough to decide which of these stocks is the better buy right now. That’s not because they are both such compelling opportunities — quite the opposite. Super Micro Computer has a cheap earnings ratio but has a scathing short report that puts into question its accounting, it is relying on booming AI computing spending that may or may not continue, and it just had its auditor resign. Is there even one thing to like about this business?
On the other hand, Palantir looks like a great business. It has fast-growing revenue and fantastic profit margins. Its stock just trades at an undeniably absurd price, with a market cap of $100 billion and a P/S of 43. This reminds me of when Shopify stock traded at a P/S of 50 in 2021. Its stock is off 52% from all-time highs today, even though its business keeps growing rapidly.
I am going to cheat with this answer: Don’t buy either of these stocks. There are thousands of stocks you can choose for your portfolio. Avoid buying those with extreme valuations or ones with accounting fraud allegations, and you will be better off over the long term.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and Shopify. The Motley Fool has a disclosure policy.
