The launch of OpenAI’s ChatGPT in late 2022 has spurred interest in companies that could support or monetize generative AI. Nvidia (NASDAQ:NVDA) And Palantir Technologies (NYSE:PLTR) are two excellent examples. Let’s explore the pros and cons of both stocks to decide if they have a place in your portfolio in October and beyond.
1. Nvidia: the hardware leader
With shares up 160% over the past 12 months, Nvidia remains one of the biggest beneficiaries of the AI hype cycle. And unlike some alternatives, its rebound is based on equally impressive operational results.
To say business is booming may be an understatement. SecoRevenue for the second quarter (ended July 28) soared 122% year-over-year to $30 billion, driven by massive demand for its premium products. graphics processing units (GPUs) used to run and train AI algorithms. The company’s technology gap allows it to sell its hardware at a very high price (with gross margins of 75%), which has helped its operating profit soar 174% to $17.6 billion. .
But despite good results, the company is at the head of a speculative and unproven sector. Large language models (LLM), like ChatGPT and Google Gemini Since Alphabet are full of errors. And they will be difficult to monetize due to open source competition. If tech giants stop investing in their often unprofitable AI projects, Nvidia’s operational momentum could evaporate as quickly as it appeared.
That said, with a forward price/earnings multiple (P/E) of just 31, Nvidia’s stock is relatively cheap considering its epic growth. The market seems to be waiting for the software side of AI to show more results before unlocking the company’s next bull run.
2. Palantir: a software competitor
While Nvidia focuses on the hardware side of the AI opportunity, Palantir focuses on software, combining the LLMs behind platforms like ChatGPT with proprietary data analytics and machine learning.
The company has a relatively large advantage due to its focus on sensitive government contracts. And a relatively fast-growing private sector company could provide much-needed growth and diversification.
For tech companies, working with the government can be risky for their brand image. This challenge could have led Google to abandon a military AI project called Maven amid employee backlash in 2019.
On the other hand, Palantir has made its name through government contracts, even helping with high-profile missions like the search for Osama bin Laden in 2011. This niche makes it resistant to this type of pressure.
And in In September, the company won a $100 million contract for the US military’s Maven Smart System project, which Google abandoned. Palantir also works with the governments of Israel and Ukraine on military targeting.
However, while contracting is Palantir’s bread and butter, he also attracts commercial clients interested in its data analysis services.
Revenue for the second quarter (ended June 30) increased 27% year-on-year to $678 million, helped by a 33% rise in commercial revenue to $307 million, or just under half of the total. However, Palantir’s forward price-to-earnings (P/E) multiple of 87 is significantly higher than S&P500 estimate of 24. And growth would have to accelerate considerably for this price to make sense.
Which action suits you best?
Nvidia and Palantir are two of the top AI stocks that should be on your investment radar. However, uncertainty about the future of AI means that now is probably not the right time to bet on either company.
With a forecast P/E of only 31, Nvidia’s valuation appears to incorporate most of the risk. However, Palantir’s forward P/E of 87 seems too high. And that could lead to significant downsides if the company fails to meet high expectations.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Alphabet, Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
2 Top Artificial Intelligence (AI) Stocks to Watch in October was originally published by The Motley Fool