Data is at the core of artificial intelligence (AI) technology. AI helps people understand and analyze data like never before, and these powerful models depend on data to learn and train. Two hot data stocks stand at the forefront of AI: Palantir Technologies (NYSE: PLTR) and Snowflake (NYSE: SNOW).
They are both proving integral to deploying AI, whether on the front end with applications or the back end with data warehousing and querying.
However, these two stocks have moved in different directions. Palantir has been a Wall Street sensation, while Snowflake has steadily declined after a red-hot initial public offering. Which is the better AI stock to buy today?
Mission-critical AI software
Both companies' products are essential to deploying AI because most organizations lack the developmental chops to build their AI applications or, at the very least, don't have well-structured data to integrate into the applications.
Palantir builds custom software applications for companies and governments to deploy AI and data analytics technology. The company has worked with the U.S. government for years and has increasingly expanded into the private sector with commercial applications ranging from manufacturing supply chains to operating large hospitals. Palantir's revenue growth has accelerated since last summer after it launched its artificial intelligence platform (AIP) for deploying AI applications.
Snowflake is a cloud-based data warehousing platform enabling companies to store, organize, and query their data securely. The company currently works with 736 of the Forbes Global 2000. Its cloud-neutral platform works across the primary cloud vendors, giving customers valuable flexibility versus locking in with one platform. Snowflake's billing is usage-based, so it can grow as companies create and query more data. The company sports a robust 127% net revenue retention rate.
Financials are trending in opposite directions
Snowflake and Palantir are similar-sized businesses today. Over the past four quarters, Snowflake generated $3.2 billion in revenue and $815 million in free cash flow, compared to Palantir's $2.5 billion in revenue and $696 million in free cash flow. But it's become evident that these two companies are moving in opposite directions.
You can see that Snowflake's revenue growth rate is slowing while Palantir's has accelerated since last summer:
The two companies are also miles apart in bottom-line profitability. Snowflake is generating a lot of free cash flow by issuing stock-based compensation. When you factor everything in by looking at generally accepted accounting principles (GAAP) income, Snowflake has lost over $1 billion over the past four quarters. Meanwhile, Palantir is also GAAP profitable, and net income is growing:
Snowflake isn't in any financial trouble. The company is cash-flow-positive and has over $3 billion in cash and zero debt on its balance sheet. Still, the steep GAAP losses are concerning because they raise the question of how much dilution investors must endure. Stock-based compensation increases the share count and decreases the value of existing shares because they represent a smaller share of the company.
Which is the better AI stock?
Palantir's accelerating revenue growth and ample profits make it the clear winner over Snowflake. It's the better AI stock until Snowflake stabilizes its revenue growth and shows a better path to GAAP profits.
The market knows how these two companies are performing -- Palantir stock has soared 154% over the past year, while Snowflake stock has declined 24%.
Unfortunately, Palantir's success has inflated the stock's valuation to bubble-like levels. Today, Palantir trades at a price-to-sales (P/S) ratio of 38, higher than during most of 2021, when the market was in an Everything Bubble due to zero-percent interest rates. It's among the highest you'll find on the market today.
A great company can still be a lousy investment if you pay too much for it, so investors should think hard about buying the stock at these prices. Maintaining such high valuations is hard without meeting increasingly higher expectations. There is a high chance that this comes back to bite the stock at the first sign of adversity or broader market volatility. Meanwhile, Snowflake trades at a much more reasonable P/S ratio of 12. It might even be the better buy today if you believe Snowflake will improve in the future. If not, try to exercise patience and wait for a better price to buy Palantir.
Should you invest $1,000 in Palantir Technologies right now?
Before you buy stock in Palantir Technologies, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Palantir Technologies wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $765,523!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of October 7, 2024
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and Snowflake. The Motley Fool has a disclosure policy.
Better Artificial Intelligence (AI) Stock: Palantir Technologies vs. Snowflake was originally published by The Motley Fool