There may not be a hotter stock on Wall Street right now Palantir Technologies. The company’s artificial intelligence (AI) software is fueling its growth engine, and there are major market opportunities in both government and private sectors. The stock is up about 800% since the start of last year.
Be warned. Momentum can sometimes push stock prices to irrational heights, and Palantir’s valuation has become arguably unsustainable at more than fifty times the company’s revenue.
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There may be a better AI stock to buy now. ASML (NASDAQ: ASML) plays a crucial role in the production of cutting-edge chips that power AI technology. However, the company’s geopolitical issues have suppressed its stock price, creating buying opportunities for long-term investors.
Here’s what you need to know.
There is a difference between a company and its shares. Palantir makes a compelling case that it’s a great company. Data analytics software has become increasingly widespread among government and enterprise customers, and the AIP platform, which helps companies deploy AI applications, has fueled its growth. Palantir’s revenue grew 30% year over year in the third quarter, a continued acceleration that has investors excited about the company’s future.
But as I said above, the stock has multiplied from just under two years ago. In fact, on a price-to-sales basis, stocks are more expensive today than they were during the 2021 Everything Bubble, a stock market bubble that resulted from zero interest rate fiscal policies following the COVID-19 pandemic:
This probably won’t end well. Stocks generally don’t sustain sky-high valuations like this, and it will take years of the stock going nowhere, or a dramatic drop before Palantir’s valuation becomes sensible again. In other words: this is not the stock you want to invest fresh money into right now.
On the other hand, ASML has moved in the opposite direction since the stock reached its peak in July. ASML designs and produces special equipment, called lithography machines, for the production of semiconductors (chips). It is an important cog in the technology supply chain because it is the only company That makes extreme ultraviolet lithography (EUV) machines necessary to produce high-quality chips, such as those used in AI data centers.
ASML’s dominance in lithography has helped the stock deliver stunning investment returns. The stock’s total return has exceeded 31,000% since the mid-1990s, easily exceeding expectations. S&P500. Long-term investors in ASML shares have likely enjoyed life-changing wealth and may even have become millionaires.
So why is this fantastic stock down almost 40% from its peak?
The Dutch company has fallen victim to geopolitical tensions between China and the United States. China is ASML’s core market and represents almost half of the total turnover in the third quarter. The United States is putting pressure on ASML to limit its business with China for national security reasons. These concerns were legitimized by the third quarter earnings figures when ASML lowered its turnover forecast for 2025 from the previous range of 30 billion to 40 billion euros to 30 billion to 35 billion euros.
The geopolitical fears are justified and the third quarter results showed that the tensions are already having an impact on the company. However, the situation looks more like temporary turbulence than permanent damage.
Why? Because these political tensions are unlikely to last forever.
ASML is the most valuable company in the Netherlands. Will the Dutch government allow ASML to implode due to political posturing among other countries? That’s possible, but I wouldn’t make that bet. Don’t forget that ASML has a monopoly on EUV machines. As long as global demand for chips increases over time, ASML has a good chance of realizing those growth opportunities, selling to China or wherever that production ends up.
Meanwhile, the stock trades at a price-to-earnings (P/E) ratio of 32, below its 10-year average of 37. Few dominant companies are trading at a discount to their historical norms in today’s market. The stock is still uncertain as long as geopolitical waters remain choppy, but it looks much safer than Palantir, which has essentially turned into a bubble at these prices.
Consider the following before buying shares in ASML:
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Palantir Technologies. The Motley Fool has a disclosure policy.
Should You Buy These Millionaire-Maker Stocks Instead of Palantir Technologies? was originally published by The Motley Fool
