It seems like all stocks related to artificial intelligence (AI) have soared lately. There are no two better examples than that Super microcomputer(NASDAQ:SMCI) And Palantir(NYSE:PLTR)whose shares both rose more than 100% at one point this year. Investors are enamored with the tech industry’s rising spending to support the growth of AI software tools, hoping to ride the wave of one of the next big tech trends. Analysts expect cloud computing revenues to reach $2 trillion by 2030, which should drive revenue growth for many of these AI companies.
Both Super Micro Computer and Palantir are labeled as AI stocks, but that doesn’t necessarily mean they’re great investments. What’s the Better Buy Today: Palantir or Super Micro Computer Stock? Let’s take a closer look and find out.
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Palantir makes analytical software for major companies and the US government, mainly the military and intelligence services. 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 benefited the company a lot.
Last quarter, total revenue 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 successfully bringing its analytics and AI platform from government to private companies, presenting a much larger market opportunity.
As a software company, Palantir has best-in-class gross margins, above 80%. This has allowed the company to increase its operating margin to approximately 12% in the last twelve months and to 16% in the last quarter. As we’ll see, Super Micro Computer can’t compete with Palantir when it comes to the unit economics of its business.
Appreciation is a different story. Palantir stock has risen 372% since its 2021 IPO. While revenue and profitability have improved, it hasn’t kept up with the share price increase. Today, the stock trades at a record high price-to-sales ratio (P/S) of 43. Not earnings, but sales. No matter how you look at it, no matter how high a company’s margin is, this is a valuation ratio. Anyone considering buying Palantir stock at this level should think about this.
One of the fastest growing companies in the world is Super Micro Computer. The builder of data centers for AI and cloud providers grew an astonishing 143% year-over-year to $5.3 billion last quarter, thanks to strong customer demand. For the full fiscal year 2024 – which ended last quarter – the company generated $14.9 billion in revenue.
However, since Super Micro Computer is a reseller of computer products, its sales come with low gross margins. In fact, its gross profit margin over the last twelve months was just 14.3%, which is lower than Palantir’s operating margin. Although it generates a much higher revenue figure each quarter, Super Micro Computer’s gross profit was barely higher than Palantir’s in the last quarter, at $596 million versus $550 million.
Another area of concern for Super Micro Computer is a major short report from Hindenburg Research that was released about two months ago. The report alleges circular accounting practices (i.e. falsifying earnings), self-dealing and undisclosed related party transactions. None of these allegations have been confirmed, but accountant Ernst and Young just resigned, saying he had little confidence in the company’s financial statements, which is clearly not a good thing.
Super Micro Computer’s stock has collapsed following this short report and the resignation of its accountant, causing its price-to-earnings (P/E) ratio to drop to 13. This is a much lower earnings multiple than Palantir, which was trading at a P/E W price is traded. of more than 200. Investors are concerned that Super Micro Computer will have to revise its financial statements because the company had poor accounting practices, which could mean these earnings are not as high as we think.
It’s hard to decide which of these stocks is the better buy right now. That’s not because they both offer such attractive opportunities – on the contrary. Super Micro Computer has a cheap profit ratio, but has a damning short report that calls its accounting into question, it’s banking on booming spending on AI computers that may or may not continue, and its accountant just had to resign. Is there anything to like about this company at all?
On the other hand, Palantir looks like a great company. It has fast growing sales and fantastic profit margins. The stock is simply trading at a decidedly absurd price, with a market cap of $100 billion and a P/S of 43. This reminds me of when Shopify The stock traded at a price-to-earnings ratio of 50 in 2021. The stock is down 52% at all times, even as the company continues to grow rapidly.
I’m going to cheat with this answer: don’t buy any of these stocks. There are thousands of stocks you can choose for your portfolio. Avoid buying investments with extreme valuations or investments with allegations of accounting fraud, and you will be better off in the long run.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Palantir Technologies and Shopify. The Motley Fool has a disclosure policy.
Better Artificial Intelligence Stock: Palantir vs. Super Micro Computer was originally published by The Motley Fool
