Enhanced AI Investment Opportunity: Palantir versus Super Micro Computers
Lately, any stocks connected to artificial intelligence (AI) have seen a significant surge in value. Two prime examples are Super Micro Computer (SMCI, up 1.08%) and Palantir (PLTR, down 1.80%), whose stocks experienced over 100% growth this year at one point. Investors are captivated by the escalating spending across the tech industry, aiming to capitalize on the growth of AI software tools and ride the wave of the upcoming technology trend. Analysts predict that cloud computing revenue will reach a staggering $2 trillion by 2030, contributing to revenue growth for several AI companies.
Both Super Micro Computer and Palantir have been classified as AI stocks, but a question arises: which of these two stocks is the better investment today – Palantir or Super Micro Computer's stock? Allow us to delve deeper into the matter.
Palantir: Spectacular Profit Margins
Specializing in analytical software for major corporations and the United States government, particularly military and intelligence agencies, Palantir became prominent by embracing the role of a software defense contractor when the majority of the tech industry shied away from working with the government. This decision has significantly benefited the company.
In the previous quarter, overall sales increased by 27% year-over-year, reaching $678 million. U.S. commercial revenue – sales to businesses in the U.S. – surged by 55% to $159 million. Palantir is remarkably successful in transitioning its analytics and AI platform from the government to the private sector, which represents a significantly larger commercial opportunity.
As a software company, Palantir boasts elite-class gross margins exceeding 80%. This advantage has enabled the company to elevate its operating margin to approximately 12% in the last 12 months and 16% in the last quarter. Upon closer analysis, Super Micro Computer fails to match up to Palantir in terms of the profitability of its business.
Valuation is a different story. Palantir's stock has exploded by 372% since its public debut in 2021. The improvement in revenue and profitability has not kept pace with the appreciation of the share price. Today, the stock trades at an all-time high price-to-sales ratio (P/S) of 43. Regardless of how high the company's margin is, this valuation ratio remains excessive. If you are contemplating investing in Palantir stock at these levels, it's crucial to ponder this fact.
Super Micro Computer: Seismic Growth
Super Micro Computer, a company renowned for providing data centers for AI and cloud providers, is one of the fastest-growing businesses worldwide. The organization experienced exponential revenue growth by 143% year-over-year in the previous quarter, amounting to $5.3 billion, driven by high demand from customers. For the entire fiscal year 2024, which concluded in the last quarter, the company recorded $14.9 billion in sales.
However, given that Super Micro Computer acts as a reseller of computing products, its revenue is backed by low gross margins. The gross profit margin was just 14.3% in the past 12 months, which is considerably lower than Palantir's operating margin. Despite generating a higher sales figure every quarter, Super Micro Computer's gross profit barely surpassed Palantir's last quarter, amounting to $596 million vs. $550 million.
There is another concern regarding Super Micro Computer: a damaging short report released by Hindenburg Research around two months ago. The report implicated questionable revenue reporting methods (i.e., fabricating revenue), self-dealing, and undisclosed related-party transactions. Although these allegations have yet to be verified, auditor Ernst and Young recently resigned, expressing a lack of confidence in the company's financial statements – a troubling sign.
Super Micro Computer's stock price has suffered a severe decline as a result of this short report and auditor resignation, causing its price-to-earnings ratio (P/E) to fall to 13. This indicates a much lower earnings multiple than Palantir, which trades at a P/E of over 200. Investors worry that Super Micro Computer will need to adjust its financial statements due to inappropriate accounting practices, which may imply that the reported earnings are not as impressive as they seem.
The Better Investment: Which One to Choose?
Deciding between these two stocks is not an easy task. Neither of them presents an irresistible investment opportunity – rather, the opposite. Super Micro Computer has a low earnings ratio but surrenders to concerns about questionable accounting practices and reliance on the booming AI computing spending trend, which may or may not persist. Is there any redeeming quality to this business?
On the other hand, Palantir appears to be a thriving business. It has a rapidly growing revenue and impressive profit margins. Its stock trades at an undeniably high price, with a market cap of $100 billion and a P/S of 43. This situation reminds me of when Shopify stock traded at a P/S of 50 in 2021. Today, its stock is down by 52% from its all-time highs, despite its business continuing to expand at a rapid pace.
I will break my promise and offer a biased opinion: neither of these stocks is an ideal investment right now. The market offers an abundance of investment options. Avoid selecting those with excessive valuations or those with accounting fraud allegations, and you will be well-positioned for long-term success.
Given the current market trends and the performance of both companies, investing in either Super Micro Computer or Palantir requires careful consideration.
Palantir's impressive profit margins and strong financial performance make it an attractive option for those seeking high-margin investments. However, its stock's high valuation and concerns about its growth pace relative to its share price might warrant cautiousness.
In contrast, Super Micro Computer, despite its strong revenue growth and low P/E ratio, faces concerns about accounting practices and questionable allegations, which could impact its long-term prospects.
In the context of finance and investing, it's essential to consider a diverse portfolio and not rely on a single investment to yield significant returns. Therefore, it might be advantageous to allocate funds towards other investments that exhibit promising growth potential and a more balanced valuation.
