Palantir and Microsoft Stocks: Analysts Predict One Will Outperform the Other in Further Market Growth
Businesses are pouring significant resources into AI-driven software, aiming to boost automation and efficiency, and harness data for smarter, faster decision-making. This trend might just be getting started, with projections suggesting the enterprise AI market could surge at an annual rate of 37.6% between 2025 and 2030, as per Grand View Research's analysis.
Two companies set to enjoy extended growth in the enterprise-software sector are Palantir Technologies (PLTR 8.54%) and Microsoft (MSFT -0.10%). Both companies have observed the positive impact of substantial AI investments on their businesses and shareholders. Palantir's stock has soared by 230% this year alone, and Microsoft has witnessed a 77% increase since its announcement of boosting its stake in AI pioneer OpenAI in early 2023.
However, Wall Street analysts predict that only one of these enterprise-software leaders will continue to climb the ladder further over the coming 12 months.
- Palantir, valued at a median-price target of $38 per share based on 22 analyst estimations, foresees a 30% drop in its share price.
- Microsoft, with a median-price target of $500 per share based on 57 analyst estimations, looks set for an 18% rise in its share price.
Here's what investors need to grasp.
Palantir: A prodigious company with a 30% potential stock depreciation
Palantir creates software designed to help government entities and commercial clients extract meaningful insights from large data sets and improve operational efficiency. Its initial focus on government contracts allowed it to develop a framework that could be applied to major commercial enterprise clients as well.
Palantir's client base among commercial enterprises is growing rapidly, increasing by 51% year-over-year. American commercial revenue swelled by 54% year-over-year in the third quarter, driving overall growth of 30%.
Simultaneously, its adjusted operating margin bulged to 38% from 29% a year ago, as it maximizes its expanding scale. It comfortably surpasses the Rule of 40, which suggests that if it allocated more to sales and marketing, it could grow even faster. However, CEO Alex Karp prefers to concentrate on development of a top-notch product for a select group of wealthy clients, arguing this yields better outcomes in the long term.
Palantir offers two primary software platforms: Gotham for government clients and Foundry for commercial clients. It introduced the Apollo platform in 2021 to ensure uninterrupted operations and allow clients to run its software in various environments.
Recently, Palantir unveiled its Artificial Intelligence Platform (AIP), enabling clients to use natural language to examine and comprehend their data, automate workflows, and build applications around their data. AIP has become a crucial driver of demand for Palantir's platform, supporting the product-focused doctrine that CEO Karp promotes.
Palantir is operating exceptionally well, but the stock price is quite high. Trading at an enterprise value-to-sales (EV/S) multiple of 46, the stock remains expensive, even when considering analysts' 2025 estimates, which only reduce the multiple to 35. Jefferies analyst Brent Thill pointed out that following Palantir's earnings presentation earlier this month, it held the most expensive valuation in the software industry. It seems challenging for the company to outperform expectations by such a significant margin and compensate for its exorbitantly high valuation.
Microsoft: An AI behemoth with accelerating growth
Microsoft is taking advantage of the growing AI investment through two strategies: its cloud-computing platform Azure and its Copilot AI agent incorporated into its enterprise software solutions.
Azure has ascended as the preferred cloud platform for developers working on AI, thanks to early investments in OpenAI, which Microsoft added an additional $10 billion to in January 2023. Azure OpenAI usage doubled during the past six months, according to management, who also revealed that Azure revenue had surged by 33% year-over-year in the latest quarter.
Management expects Azure revenue to quicken in the second half of fiscal 2025 as many of its capital investments from 2024 will require time to mature. The demand for Azure's capacity remains strong.
Meanwhile, Microsoft is experiencing robust demand for Copilot, which is available in Github and Microsoft 365. Github Copilot enterprise clients increased by 55% sequentially in the last quarter, leveraging the AI agent to produce code, streamline workflows, and locate vulnerabilities in their software. Almost 70% of Fortune 500 companies utilize Microsoft 365 Copilot, and daily usage has doubled sequentially in the last quarter. Copilot Studio provides enterprises with the means to develop agents tailored to their data and link them to various Microsoft software tools.
Importantly, Microsoft's dominance in the enterprise-software sector reinforces the Azure business, as enterprises gradually shift a larger portion of their workload to the cloud. Microsoft facilitates simple management of a hybrid cloud environment utilizing Azure, allowing clients to transition at their own pace.
At its current cost, Microsoft's shares appear enticing. Their enterprise value-to-revenue (EV/R) ratio is slightly more than 12. When you factor in analysts' forecasts for fiscal 2025, this ratio drops to around 11. Some might argue that its 32.5 times projected-earnings multiple is costly, but considering Microsoft is expanding through two AI trends and has ample potential for share repurchases, its high valuation appears much more rational. The financial sector seems to concur with this assessment.
In light of the growing enterprise AI market, companies like Palantir and Microsoft are keen on investing heavily in AI-driven technology. Palantir, for instance, has seen a 230% increase in its stock price this year due to its successful AI investments, showing the potential returns that come with such investments in the finance sector.
To maximize its profitability, Palantir focuses on developing top-notch products for a select group of clients, which has led to a 38% adjusted operating margin and a rapid growth in its commercial client base. However, with a high valuation, it might be challenging for the company to meet analyst expectations and justify its current price tag.
