Two of this year’s hottest stocks are both darlings of the artificial intelligence (AI) movement. Software developer for data analysis Palantir Technologies (NASDAQ:PLTR) and cybersecurity specialist CrowdStrike (NASDAQ: CRWD) will be in the spotlight for much of 2024 – albeit for very different reasons.
While Palantir has finally proven itself to be a rising star in the enterprise software space, CrowdStrike’s reputation took a major hit earlier this year after a glitch in its platform caused unprecedented outages for many of its customers.
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Nevertheless, I remain optimistic about CrowdStrike’s long-term story — so much so that I think the company could be worth more than Palantir over the next decade.
Below, I’m going to illustrate Palantir’s meteoric rise to the top of the AI software kingdom and outline how CrowdStrike could become the most valuable company in the long run.
As of this writing, Palantir stock is up 287% in 2024 and is the second best performing stock in the world. S&P500.
The main driver behind Palantir’s surge is the huge demand for its Artificial Intelligence Platform (AIP) software. Until the release of AIP, Palantir was widely viewed by skeptics as a consulting firm for the federal government with limited software capabilities. But over the past year, Palantir has turned that narrative on its head.
Over the past twelve months, Palantir has increased its customer base by 39%. Even more impressive, the company has rapidly penetrated the private sector, growing its commercial customer base by more than 50% over the twelve-month period ending September 30.
The obvious benefit of a larger number of customers is accelerated sales. But what makes an investment in Palantir even more special is the company’s ability to expand margins and generate positive free cash flow and net income along with growing revenues.
All of these factors make Palantir seem like a no-brainer investment opportunity… until you look at the chart below.
The obvious outlier in the chart above is that Palantir’s price-to-sales ratio (P/S) of 65 is not only the highest of this cohort, but is almost three times as high as the next comparable company. While an argument can be made that Palantir deserves a premium multiple, the stock has experienced outsized valuation expansion for an otherwise short period of time. Frankly, I think it’s this very dynamic that is causing some hedge funds to significantly reduce their exposure to Palantir and take profits.
Let me get the obvious point out of the way: CrowdStrike is certainly not a cheap stock. Even with the significant sell-off caused by the security outage over the summer, the stock still trades at a significant premium to its peers.
Nevertheless, I see some important differences between an investment in CrowdStrike and an investment in Palantir.
As I’ve previously explored, CrowdStrike found itself in rare company a few years ago during the height of the COVID-19 pandemic. During the COVID-19 recession, demand for CrowdStrike’s products actually increased. I see two reasons for this. The obvious reason is that work-from-home protocols have become the norm during peak pandemic days. Therefore, during this phase of remote work, companies have had to double down on cybersecurity protocols on work-issued devices.
However, taking it a step further, I’d say CrowdStrike is well-positioned during virtually any economic cycle as cybersecurity investments increasingly become a non-negotiable.
In other words, while data analytics is important, Palantir’s value proposition becomes harder to justify in tough times when budgets are tight. In my view, the same cannot be said about cybersecurity.
The CrowdStrike security incident occurred on July 19. About a month later, the company reported earnings for the second quarter of fiscal 2025 (ending July 31). For me, the most important number in that report was annual recurring revenue (ARR), which came in at $3.9 billion.
Fast forward to Q3, when CrowdStrike ended the quarter with just over $4 billion in ARR.
Despite any reputational damage from the outage, CrowdStrike has still managed to grow its ARR over the past two quarters. I think this is a testament to the company’s superior products and its customers’ heavy reliance on CrowdStrike’s security backbone.
Ultimately, I think both Palantir and CrowdStrike are expensive stocks. However, Palantir’s valuation is too high and the stock is overbought. As such, the company must prove it can grow to this premium valuation – which will be no easy task given the intensity of the enterprise software landscape. Over time, it could become more challenging to compete with existing software vendors, even if Palantir has the superior product. Palantir’s ability to scale in the long term could all come down to its pricing compared to competing platforms.
Instead, I think companies will continue to increase their investments in cybersecurity as the threats of fraud and ransomware increase and become more sophisticated. Given CrowdStrike’s proven ability to grow during tough economic times, such as recessions and challenging business-specific periods (i.e. downturns), I believe the company is well positioned to accelerate revenue, increase margins and profits in the coming years.
For these reasons, I think CrowdStrike has a better chance of experiencing a higher valuation than current levels and could surpass Palantir’s if the software developer were to show any sign of sustained growth.
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Adam Spatacco holds positions at Palantir Technologies. The Motley Fool holds positions in and recommends Atlassian, CrowdStrike, Datadog, Fortinet, MongoDB, Okta, Palantir Technologies, ServiceNow, Snowflake, Workday, and Zscaler. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
Prediction: This Spectacular Artificial Intelligence (AI) Stock Will Be Worth More Than Palantir by 2030 Originally published by The Motley Fool
