Anticipated Outcome: Two Artificial Intelligence (AI) Shares to Outvalue Palantir by the Final Quarter of 2025

Anticipated Outcome: Two Artificial Intelligence (AI) Shares to Outvalue Palantir by the Final Quarter of 2025

Palantir Technologies (PLTR -3.72%) had an exceptional performance in 2024, making it one of the top-performing stocks. The year started strong for the AI-driven enterprise software company, and this momentum escalated in September due to a impressive earnings report and inclusion in the S&P 500. The stock market's continued support pushed the company's market cap above $187 billion as of this writing.

However, many financial analysts caution that the stock's performance may be overly optimistic. Only three out of 22 analysts covering the stock recommend buying or heavily investing in it. Furthermore, none of these analysts have a 12-month price target higher than the current stock price, indicating potential challenges in justifying the stock's current valuation.

Investors seeking to incorporate AI stocks into their portfolio have numerous alternatives. Two other companies appear more appealing than Palantir, which currently boasts a high valuation. I predict that by the end of 2025, these two companies will surpass Palantir's value, thanks to their remarkable relative price performance compared to the year's standout performer.

1. Palo Alto Networks

Two significant trends are driving demand for Palo Alto Networks' (PANW -1.23%) cybersecurity services. Firstly, enterprises are shifting towards cloud computing for their data and software needs, requiring increased network security as they migrate or adopt a hybrid approach. Secondly, the widespread adoption of a hybrid work model has introduced additional security vulnerabilities, as many workplaces now operate with a mix of office and remote employees.

Palo Alto provides security solutions across clients' networks (firewalls) in both hardware and software formats. It also offers solutions for cloud and endpoint security, ensuring only authorized devices can access sensitive network data.

Palo Alto's significant advantage in the cybersecurity market lies in its use of machine learning and artificial intelligence. Building an effective cybersecurity system using machine learning is challenging due to the need for valuable data. As a leader in the field, Palo Alto has a significant data advantage compared to its competitors.

This advantage translates into better AI performance, making Palo Alto more attractive to potential clients. Moreover, the company's capabilities help it retain existing clients, creating a self-sustaining growth cycle.

Additionally, switching costs for existing clients are a consideration. Few security analysts are likely to jeopardize their positions by moving to a cheaper alternative, making it more likely that they will return to Palo Alto Networks as their needs expand. Palo Alto has also expanded its offerings through strategic acquisitions and seen substantial success in cross-selling new products to existing clients.

As Palo Alto shifts to more software-based solutions and continues to cross-sell to clients, its gross margin is expected to increase progressively. Consequently, investors should expect profits to grow at a faster rate than revenues for the foreseeable future.

Currently, Palo Alto's shares trade with an enterprise-value-to-revenue ratio of 14.6. Considering this ratio, the stock represents a fair investment value. If Palo Alto can maintain this multiple through 2025, the stock is expected to rise by approximately 14% according to analyst estimates. With a market capitalization of $124 billion as of this writing, this growth would elevate Palo Alto's value to approximately $142 billion by the end of 2025. This would require Palantir's stock to decrease by approximately 24% from its current price to be considered less valuable than Palo Alto.

2. Micron Technology

When it comes to semiconductors, a handful of companies dominate the attention. Generally known for their GPU products, Nvidia is one such company, but an often overlooked key component supplier for these AI chips is Micron Technology (MU -1.32%).

Micron offers memory chips, such as standard DRAM and NAND, found in devices like PCs and smartphones. It also manufactures high-bandwidth memory (HBM) chips, which are incorporated into high-end GPUs by manufacturers like Nvidia. Micron has reaped significant benefits from the surge in AI spending and development.

Micron's data center revenue surged more than 400% year-over-year during its first quarter, which concluded in November. The data center segment, driven by HBM chips, now accounts for over half of Micron's total sales.

Management is optimistic about AI's potential to transform Micron's business. They anticipate the HBM market to grow from $16 billion in 2024 to $100 billion by 2030. Given that only three companies, including Micron, produce HBM chips, Micron is poised to benefit significantly from this market expansion.

The strength of the data center business can help offset potential weaknesses in the consumer segment. Micron reduced its forecast for the second quarter due to inventory reductions from consumer electronics manufacturers.

However, the consumer segment's downturn represents the most significant risk in investing in Micron. Micron manufactures its own chips, requiring substantial capital expenditures but resulting in relatively stable growth in cost of goods as production capacity increases. Micron's chips are virtually interchangeable with its competitors, making pricing highly competitive.

Essentially, whenever there's a significant need for Micron's semiconductors, it receives an influx of orders and better pricing, while its production expenses stay fairly steady. Conversely, when demand decreases, it makes less income, yet the same expenses continue, potentially leading to negative returns on capital investment.

It's likely that Micron will experience extraordinary demand for its HBM chips in 2025, given that major tech companies have announced plans to significantly boost their data center investments. This surge should outweigh any slump in the consumer market, and experts anticipate a 39.6% revenue increase for the year. Currently, at an enterprise-value-to-revenue ratio of 3.7, the shares appear undervalued, despite the risk of cyclicality.

If the shares multiply their current multiple by 1.3 over the next year, and analyst projections hold true, Micron would witness a nearly 50% boost in its stock price. This would lead to a market cap of approximately $150 billion. If Palantir's shares were to fall by 20% within the same period, Palantir's market cap would fall under Micron's.

Regardless of whether Micron or Palo Alto Networks surpasses Palantir in value by the end of 2025, both companies appear more appealing than the current overpriced contender.

1. Based on the favorable trends in the cybersecurity market, an analyst might suggest: Investors who are cautious about Palantir's high valuation could consider diversifying their portfolio with Palo Alto Networks, as its lower enterprise-value-to-revenue ratio and better growth potential make it a more attractive investing opportunity.
2. With the surging demand for HBM chips in the data center market, an investor might consider: Micron Technology could potentially be a better long-term investment than Palantir, given its undervalued shares and high growth potential in the HBM market, which could help it surpass Palantir's market cap by the end of 2025, assuming Palantir's stock doesn't significantly recover.

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