Palantir‘S (NYSE: PLTR) shares have more than doubled in the past 12 months. The data mining and analytics company attracted a stampede of bulls as revenue growth accelerated, margins expanded and profits soared. The company’s growing market cap and consistent earnings also recently earned it a spot on the S&P 500.
Palantir’s revenue grew 17% in 2023, and the company expects growth of 23%-24% this year as it wins new government contracts, expands its faster-growing U.S. commercial business and rolls out more generative AI tools to process all its data. It turned profitable in 2023, and analysts expect earnings per share to more than double this year.
That’s a fantastic prospect, but Palantir’s stock is also priced for perfection at more than 70 times forward-adjusted earnings and 20 times next year’s revenue. So instead of chasing Palantir at these levels, investors should be looking at other AI-focused stocks that are also growing fast but trading at more reasonable valuations. I believe these two undervalued stocks fit the bill: Innodata (NASDAQ: INOD) And Data Dog (NASDAQ: DDOG).
1. Innodata
Innodata provides business process, technology and consulting services, as well as software for creating, managing and using digital information. The company went public in 1993 and grew its revenue at a meager 6% compound annual growth rate (CAGR) from 1994 to 2019. By the end of 2019, its stock had fallen to $1.14 — a 32% discount from the split IPO price of $1.67 — and it was widely dismissed as a slow-growth IT services and enterprise software company.
But today, Innodata shares trade for around $14. Revenue accelerated, growing at a CAGR of 12% from 2019 to 2023. Analysts expect revenue to grow at an even faster CAGR of 38% from 2023 to 2026. They also expect it to become profitable in 2024 and nearly double its annual earnings per share (EPS) by 2026. Those are staggering growth numbers for a stock that trades at 31 times forward earnings and 2 times next year’s revenue.
That sudden growth spurt was driven entirely by Innodata’s launch of new generative AI services for five of the “Magnificent Seven” companies. The company had already signed master service agreements with three of those tech giants in early 2024, and it’s gradually strengthening its relationships with two of those other companies. That steady expansion could turn this dusty old IT services company into a hyper-growth AI stock in the years to come.
2. Data Dog
Datadog pulls diagnostic data from an organization’s infrastructure, applications, and logs in real time and organizes it all into unified dashboards. This streamlined approach breaks down silos and makes it easier for IT professionals to spot potential issues. It also simplifies that process with generative AI tools and chatbots.
Datadog went public in 2019 at $27, and shares skyrocketed to an all-time high of $196.56 during the height of the meme and growth stock rally in November 2021. But today, it trades for around $107. The company pulled back as growth cooled in a more challenging market and rising interest rates squeezed valuations, but it’s still a high-growth stock.
Datadog’s revenue grew at a CAGR of 67% from 2019 to 2022, as its total number of large customers (generating more than $100,000 in recurring revenue annually) more than tripled. But in 2023, revenue only grew by 27%, as its number of large customers grew by 15%. However, it turned profitable for the year as it reined in its expenses.
The company’s slowing growth has been disappointing, but analysts still expect revenue to grow at a 24% CAGR from 2023 to 2026, while EPS will rise at a 77% CAGR. Those growth numbers are similar to Palantir’s, but Datadog trades at just 55 times forward-adjusted earnings and 11 times next year’s revenue. As a result, this often-overlooked growth stock could still attract more bulls and surpass Palantir in the near future.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog and Palantir Technologies. The Motley Fool has a disclosure policy.
Forget Palantir: 2 Tech Stocks You Should Buy Instead was originally published by The Motley Fool
