The launch of OpenAI’s ChatGPT in late 2022 has increased interest in companies that can support or monetize generative AI. Nvidia (NASDAQ: NVDA) and Palantir Technologies (NYSE: PLTR) are two good examples. Let’s consider the pros and cons of both stocks and decide whether to keep them in your portfolio beyond October.
1. Nvidia: A leader in hardware
With its stock price up 160% over the past 12 months, Nvidia remains one of the biggest beneficiaries of the AI hype cycle. And unlike some alternatives, its rise is backed by equally impressive operational results.
It may not be an exaggeration to say that the business is growing rapidly. Revenues rose 122% year-over-year to $30 billion in the second quarter (ending July 28), driven by heavy demand for high-end graphics processing units (GPUs) used to run and train AI algorithms. Increased. Operating income increased 174% to $17.6 billion as the company’s technological moat allows it to sell hardware at significant markups (75% gross margin).
However, despite its strong performance, the company leads an industry that is speculative and unproven. Large-scale language models (LLMs) such as Alphabet’s ChatGPT and Google Gemini are full of mistakes. And open source competition will make monetization difficult. If the tech giant stops investing in often unprofitable AI projects, Nvidia’s operational momentum could disappear as quickly as it appears.
Still, at just 31 times forward earnings, Nvidia stock is relatively cheap given its impressive growth. The market appears to be waiting for the software side of AI to show further results before unleashing 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 the software, combining the LLM behind platforms like ChatGPT with proprietary data analytics and machine learning .
The company has a relatively strong moat because it focuses on sensitive government contracts. And relatively fast-growing private companies could provide much-needed growth and diversification.
For technology companies, working with governments can be a risk to their brand image. This challenge may have led Google to abandon a military AI project called Maven in 2019 following employee backlash.
Image source: Getty Images.
Meanwhile, Palantir made a name for itself through government contracts, helping with high-profile missions such as the 2011 hunt for Osama bin Laden. This niche market makes the company resistant to this kind of pressure.
And in September, the company won a $100 million contract for the U.S. Army’s Maven smart system project, which was abandoned by Google. Palantir also works with the Israeli and Ukrainian governments on military objectives.
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But while the contracts are Palantir’s bread and butter, they’re also attracting commercial clients interested in the company’s data analytics services.
Revenue for the second quarter (ending June 30) rose 27% year over year to $678 million, with commercial revenue up 33% to $307 million, just under half of the total. . However, Palantir’s forward price/earnings ratio (P/E) of 87 times is significantly higher than the S&P 500’s estimate of 24 times. And for this price to make sense, growth would need to accelerate significantly.
Which stocks are good for you?
Nvidia and Palantir are two top AI stocks on your investment radar. But uncertainty about the future of AI means it’s probably not the right time to bet on either company.
At just 31 times forward P/E, NVIDIA’s valuation appears to have factored in most of the risk. However, Palantir’s forward PER of 87 seems too high. And if a company fails to meet high expectations, it can mean significant downside.
Should you invest $1,000 in Nvidia right now?
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Suzanne Frey, an Alphabet executive, is a member of the Motley Fool’s board of directors. Will Ebifan has no position in any stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
Two Artificial Intelligence (AI) Stocks to Watch in October were originally published by The Motley Fool.