Key Points
The boom in artificial intelligence (AI) has lifted some stocks to dizzying levels — few more than the AI data analytics company Palantir Technologies (NASDAQ: PLTR) or the electric vehicle (EV) and humanoid robotics company Tesla (NASDAQ: TSLA). As of the close of trading Monday, they were trading at roughly 108 times and 190 times forward earnings, respectively.
These are valuations that might once have been nearly unimaginable, and far exceed the figures seen for the other “Magnificent Seven” stocks or among most other beneficiaries of the AI trade. But which is the better buy now?
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Palantir: 109 times forward earnings
Palantir burst onto the scene thanks to its data analytics platforms, which enabled government organizations and businesses to leverage their data in ways that were never possible before.
The company’s tools can gather data from a wide variety of sources and analyze it to produce insights that better inform clients and help determine their decision-making. The platforms can also be used by people who don’t have experience working with AI models, and make it much easier to build large, complex data projects.
It just reported strong second-quarter results, with 93% year-over-year revenue growth, an adjusted operating margin of 62%, and an adjusted free cash flow margin of 63%.
Palantir continues to resonate with commercial customers, with commercial revenue growing nearly 150% year over year in the quarter, and the value of remaining deals for businesses up 124% year over year.
Those Q2 results helped bring the stock into the black this year after its struggled due to concerns about its elevated valuation and reports that some foreign governments had replaced the company’s offerings with tools delivered by domestic competitors.
I don’t dispute that Palantir’s capabilities are incredibly strong and clearly resonating with the market, but at this valuation, there is very little margin for error. Any sign of competition that could erode the company’s moat or even a bad quarter could hit the stock hard.
Tesla: 191 times forward earnings
Tesla is another stock that investors have long rewarded with an ultra-premium valuation. The company, which pioneered the mass market for electric vehicles, is now seen as one of the likely candidates to commercialize fully self-driving robotaxis and humanoid robots.
The company has now deployed robotaxis, although it’s difficult to know how much progress the fleet is truly making or how autonomous all the vehicles actually are. As of late July, its robotaxi service was reportedly operating in Austin, Dallas, and Houston in Texas; Miami, Orlando, and Tampa in Florida, and San Francisco.
Management says its robotaxis had covered 2.5 million cumulative paid miles at the end of the second quarter and driven more than 380,000 unsupervised miles.
However, these figures are growing much more slowly than CEO Elon Musk initially predicted. Meanwhile, Alphabet’s competing robotaxi business Waymo has reportedly covered over 200 million fully autonomous miles.
On Tesla’s second-quarterearnings call Musk said the company will soon begin production of its Optimus humanoid robots, which he thinks will eventually be its largest product ever.
However, he acknowledged that production for robots will follow an S-curve manufacturing ramp-up, with growth starting slowly, although “the initial portion of the S-curve will be quite flat and long because of the newness of the parts in the robot.”
Looking at both Tesla and Palantir, I don’t plan on buying either stock at current valuations. But if I did have to choose, I would go with Palantir right now. Not only does it trade at a lower valuation, but its products and services are also clearly resonating with customers.
Meanwhile, Tesla has tremendous potential, but much about that is still to be determined. Who knows what the actual timeline will be for the company to achieve a full-scale robotaxi fleet and a line of humanoid robots, if it ever does.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and Tesla. The Motley Fool has a disclosure policy.
