Comparing Two AI Stocks: Palantir vs. Super Micro Computer

As the excitement surrounding artificial intelligence (AI) continues to grow, stocks associated with this field have seen substantial increases. Two notable examples are Palantir (PLTR) and Super Micro Computer (SMCI), both of which saw their stock prices rise by over 100% at one time this year. Investors are keen to capitalize on the increasing investments in AI, especially as analysts anticipate that cloud computing revenue will hit $2 trillion by 2030. This anticipated growth is expected to benefit many companies involved in AI.

However, being labeled as an AI company does not automatically equate to being a good investment. Thus, a closer examination is necessary to determine whether Palantir or Super Micro Computer is the better investment choice at this time.

Analyzing Palantir: Strong Profit Margins

Palantir specializes in analytical software tailored for large corporations and U.S. government entities, particularly in defense and intelligence sectors. The company gained prominence for its willingness to collaborate with the government, while many in the tech sector opted out. This strategy has proven effective for its growth.

In the last quarter, Palantir reported a notable sales growth of 27% year-over-year, bringing in $678 million. Its U.S. commercial revenue surged by 55%, reaching $159 million. The company has successfully expanded its analytics and AI services from governmental applications to private enterprises, representing a more extensive market opportunity.

With gross margins exceeding 80%, Palantir stands out as a software company with strong financial metrics. This has allowed for an operating margin increase to around 12% over the past year and 16% in the last quarter. When comparing unit economics, Palantir appears to have an advantage over Super Micro Computer.

However, when discussing valuation, Palantir's stock has increased by an astonishing 372% since its public debut in 2021. Despite improvements in revenue and profitability, the stock price has outpaced these advancements significantly. Currently, Palantir trades at a price-to-sales (P/S) ratio of 43, a figure that raises caution for potential investors due to its exceptionally high valuation.

Exploring Super Micro Computer: Rapid Growth

Super Micro Computer represents one of the most rapidly growing companies focused on building data centers for AI and cloud providers. Its revenue skyrocketed by 143% year-over-year last quarter, totaling $5.3 billion, demonstrating strong demand for its services. For the fiscal year 2024, the company registered sales of $14.9 billion.

However, Super Micro Computer operates as a reseller of computing products, resulting in lower gross profit margins, which stood at just 14.3% over the past year. Although it generates higher revenue than Palantir, its gross profit results from a recent quarter were only slightly ahead of Palantir, at $596 million compared to Palantir's $550 million.

Additionally, Super Micro Computer faces challenges following a critical short report from Hindenburg Research that suggested issues with its accounting practices, including potential revenue discrepancies and undisclosed related-party transactions. This sparked concerns regarding the reliability of its financial statements, especially after the resignation of auditor Ernst and Young, citing a lack of confidence in the company's financial reporting.

As a result of the adverse report and auditor resignation, Super Micro Computer's stock price dropped sharply, leading to a decrease in its price-to-earnings (P/E) ratio to 13. This is significantly lower than Palantir's P/E ratio, which exceeds 200, raising questions about the sustainability of both earnings and overall financial health.

Determining the Better Investment

Assessing whether Palantir or Super Micro Computer represents a better buying opportunity is complex. This complexity is not due to both being equally attractive but stems from various concerns affecting each stock. Super Micro Computer, while having a seemingly cheap earnings ratio, is facing serious allegations about its accounting, is heavily dependent on the ongoing growth of AI computing spending that may fluctuate, and has recently lost its auditing firm.

On the other side, Palantir appears to maintain strong revenue growth and impressive profit margins. However, its stock valuation is alarmingly high, with a market cap of around $100 billion and a P/S ratio of 43, reminiscent of when Shopify was valued at exceptionally high multiples in 2021. Despite Palantir's continued strong performance, its stock is now significantly lower than its peak values.

Thus, an effective advice based on this analysis would be to refrain from investing in either of these stocks at this time. Instead, considering a diverse range of investment options without extreme valuations or accusations of accounting irregularities would likely yield better long-term results.

AI, stocks, investment