Companies are spending heavily on artificial intelligence (AI) software to drive automation and efficiency, and use data to make smarter and faster decisions. And that trend may have only just begun. According to an analysis by Grand View Research, the enterprise AI market could grow 37.6% annually between 2025 and 2030.
Two companies that are poised to see years of growth in the enterprise software space are Palantir Technologies(NYSE:PLTR) And Microsoft(NASDAQ: MSFT). Both companies have already seen the benefits of massive AI-related spending for their companies and shareholders. Palantir shares are up 230% this year alone, as of this writing. Microsoft is up 77% since announcing a larger stake in generative AI leader OpenAI in early 2023.
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Despite the strong outlook for the sector, Wall Street analysts expect only one of these enterprise software leaders to rise further over the next twelve months.
Palantir has an average price target of $38 per share, based on the estimates of 22 analysts. That implies a 30% downside to the share price, at the time of writing.
Microsoft has an average price target of $500 per share, based on the estimates of 57 analysts. That implies an increase of 18% on the share price at the time of writing.
Here’s what investors need to know.
Image source: Getty Images.
Palantir develops software to help government agencies and commercial customers use big data to find insights and create operational efficiencies. Its initial focus on government contracts allowed it to develop a framework that it could also apply to large commercial enterprises.
Palantir’s commercial customer base is growing rapidly, up 51% year over year. U.S. commercial revenue grew 54% year-over-year in the third quarter, for total growth of 30%.
At the same time, adjusted operating margin grew to 38% from 29% a year ago as the company leverages its growing scale. The company is surpassing the Rule of 40, suggesting it could have even more room to grow faster if it spent more on sales and marketing. But CEO Alex Karp would rather focus his attention on building a great product for a few select customers with deep pockets. He suggests this leads to better results in the long run.
Palantir offers two main software platforms: Gotham for government customers and Foundry for commercial customers. It introduced the Apollo platform in 2021 to ensure continuous business operations for customers and allow them to use the software in virtually any environment.
More recently, Palantir added its Artificial Intelligence Platform, AIP, which allows customers to use natural language to explore and understand their data and automate workflows. Customers can also use AIP to develop applications around their data. AIP has been a key tool for Palantir to drive customer demand for its platform, proving Karp’s product-centric thesis.
Palantir is doing exceptionally well from an operational perspective. The problem is that the shares are very expensive. The stock currently trades at an enterprise value-to-sales (EV/S) multiple of 46. Even looking at analyst estimates for 2025, the multiple only drops to 35. Jeffries Analyst Brent Thill pointed out that this is the most expensive name in software after Palantir reported earnings earlier this month. It’s hard to see the company exceeding expectations by such a wide margin that it can make up for its extraordinarily high valuation.
Microsoft has two ways to take advantage of the growing investments in AI: its cloud computing platform Azure and the Copilot AI agent built into its enterprise software solutions.
Azure has become the best cloud platform for developers working on AI. That’s backed by its early investment in OpenAI, to which it added $10 billion in January 2023. Azure OpenAI usage has more than doubled in the past six months, management said during its first-quarter earnings call in late October. As a result, Azure revenue rose 33% year over year in the most recent quarter.
Management expects Azure revenue to grow even further in the second half of fiscal 2025, as many of the 2024 capital investments will take some time to ramp up. There is no shortage of demand for its capacity.
Meanwhile, Microsoft is seeing strong demand for Copilot, which is integrated into Github and Microsoft 365. Github Copilot’s enterprise customers rose 55% last quarter as they use the AI agent to generate code, improve workflow, and address vulnerabilities. find their software. Nearly 70% of Fortune 500 companies use Microsoft 365 Copilot, and the number of people using it every day has doubled sequentially over the past quarter. Copilot Studio gives companies ways to create agents that work with their data and connect to different parts of Microsoft’s software suite.
Importantly, Microsoft’s strong position in the enterprise software segment will support its Azure business as companies slowly shift more of their workloads to the cloud. Microsoft makes it easy to operate a hybrid cloud environment using Azure, allowing customers to move at their own pace.
At the current price, Microsoft shares look attractive. The enterprise value-to-sales (EV/S) multiple is just over 12. If you use analyst estimates for fiscal 2025, that multiple is closer to 11. Some might think it’s 32.5 times of future profits is expensive, but if you consider that Microsoft is growing from two trends in AI and has a lot of capacity to buy back its shares, the premium seems much more reasonable. Wall Street certainly thinks so.
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Adam Levy holds positions at Microsoft. The Motley Fool holds positions in and recommends Jefferies Financial Group, Microsoft, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Palantir Stock vs. Microsoft Stock: Wall Street Says Only 1 Will Go Higher from Here was originally published by The Motley Fool
