Palantir's (NYSE: PLTR) stock has more than doubled over the past 12 months. The data mining and analytics company attracted a stampede of bulls as its revenue growth accelerated again, its margins expanded, and its profits soared. Its growing market cap and consistent profits also recently earned it a place in the S&P 500.
Palantir's revenue rose 17% in 2023, and it anticipates 23%-24% growth this year as it gains new government contracts, expands its faster-growing U.S. commercial business, and rolls out more generative AI tools to crunch all of its data. It turned profitable in 2023, and analysts expect its earnings per share to more than double this year.
That's a fantastic outlook, but Palantir's stock is also priced for perfection at more than 70 times its forward adjusted earnings and 20 times next year's sales. So instead of chasing Palantir at these levels, investors should look for other AI-oriented stocks that are also growing rapidly but trading at more reasonable valuations. I believe these two under-appreciated stocks fit the bill: Innodata (NASDAQ: INOD) and Datadog (NASDAQ: DDOG).
1. Innodata
Innodata provides business process, technology, and consulting services as well as software for creating, managing, and using digital information. It went public in 1993, and it only grew its revenue at an anemic compound annual growth rate (CAGR) of 6% from 1994 to 2019. By the end of 2019, its stock price had dropped to $1.14 -- a 32% discount to its split-adjusted IPO price of $1.67 -- and it was broadly dismissed as a slow-growth IT services and enterprise software company.
But today, Innodata's stock trades at about $14. Its revenue accelerated and rose at a CAGR of 12% from 2019 to 2023. Analysts expect its revenue to grow at an even faster CAGR of 38% from 2023 to 2026. They also expect it to turn profitable in 2024 and nearly double its annual earnings per share (EPS) by 2026. Those are jaw-dropping growth rates for a stock that trades at 31 times forward earnings and 2 times next year's sales.
That sudden growth spurt was entirely driven by Innodata's launch of new generative AI services for five of the "Magnificent Seven" companies. It already secured master service agreements with three of those tech giants at the start of 2024, and it's gradually tightening its relationships with two of those other companies. That steady expansion could turn this dusty old IT services company into a hyper-growth AI stock over the next few years.
2. Datadog
Datadog pulls diagnostic data from an organization's infrastructure, applications, and logs in real-time and organizes all of that information on unified dashboards. That streamlined approach breaks down silos and makes it easier for IT professionals to spot potential problems. It's also simplifying that process with generative AI tools and chatbots.
Datadog went public at $27 in 2019, and its stock skyrocketed to an all-time high of $196.56 during the apex of the meme and growth stock rally in November 2021. But today, it trades at about $107. It pulled back as its growth cooled in a more challenging market and rising interest rates squeezed its valuations, but it's still a high-growth stock.
Datadog's revenue grew at a CAGR of 67% from 2019 to 2022 as its total number of large customers (which generated over $100,000 in annual recurring revenue) -- more than tripled. But in 2023, its revenue only rose 27% as its number of large customers increased 15% -- but it turned profitable for the year as it reined in its spending.
The company's slowing growth was disappointing, but analysts still expect its revenue to grow at a CAGR of 24% from 2023 to 2026 as its EPS increases at a CAGR of 77%. Those growth rates are comparable to Palantir's, but Datadog trades at just 55 times its forward-adjusted earnings and 11 times next year's sales. Therefore, this oft-overlooked growth stock might still attract more bulls and outperform Palantir in the near future.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog and Palantir Technologies. The Motley Fool has a disclosure policy.
Forget Palantir: 2 Tech Stocks to Buy Instead was originally published by The Motley Fool