There’s a “changing of the guard” that has been going on in the Artificial Intelligence industry.
Companies like NVIDIA (NVDA), AMD (AMD), Microsoft (MSFT), and Google (GOOGL) have dominated the AI trade for the last three years as they built the foundation of the industry with their technology.
Now, that technology is being utilized by what I refer to as the “AI Services” Industry.
Names like IBM (IBM), CrowdStrike (CRWD), Salesforce.com (CRM), and Palantir (PLTR) are quickly rising to similar performances as they use the AI technology to benefit companies all over the world.
The transition is set to give investors a new chance at the type of gains that have been reserved only for the likes of NVIDIA, until now.
Two stocks are at the heart of the transition.
Chip giant NVIDIA and Palantir have turned into the power AI couple, but one is more likely to continue its strong performance than the other.
More than a year ago it started.
Palantir, the company marked as somewhat of a failure by Wall Street began to emerge from a long-term bear market trend.
The company had launched for trading in mid-2020 and immediately went up more than 300% as the market focused on two things, AI and big data.
Palantir offered the powerful combination of the two factors that Wall Street was quickly jumping over itself to invest in, resulting in a fast love affair with Palantir shares.
As a bonus, Palantir posted positive earnings in their first quarter as a publicly traded company. That also set the stage for heightened expectations for the stock.
The “honeymoon” was short-lived as Palantir followed their first quarter profits with a second quarter loss that surprised Wall Street and investors.
Shares initiated a two year, 87% decline in value, accelerated by the bear market of 2022.
Now, with positive revenue and earnings growth driven by a stream of new contract business, Palantir has matched the performance of AI darling NVIDIA over the last 12 months.
From my perspective, Palantir is set to outperform NVIDIA over the next 12 months.
The company doesn’t need an introduction, NVIDIA is and has been the leader in building the AI infrastructure.
Leveraging the powerful GPUs designed to mine Bitcoin into more powerful chips, the company serves as the heart of AI computing.
Shares of NVIDIA are trading 475% since they bottomed out in the 2022 bear market and 735% since shares of Palantir started trading.
But there’s a chink in the armor of the NVIDIA stock. It’s a weakness that Palantir doesn’t exhibit and likely to be the reason that Palantir outperforms NVIDIA shares over the next 12 months.
There’s a simple saying that captures Palantir’s strength over NVIDIA…
“Stocks climb a wall of worry”.
Most investors have heard it but they don’t want to understand how it can propel a stock higher.
The best way to portray Palantir’s Wall of Worry is with a chart of the current analyst recommendations for the stock.
Currently, only 21% of the Wall Street analysts recommend shares of Palantir as a “buy”. That number has gone down in the last few weeks as three analysts downgraded the stock for valuation reasons.
To put that into perspective, shares of NVIDIA are currently rated a “buy” by 94% of Wall Street analysts.
That’s the “Wall of Worry”, here’s how Palantir has an advantage because of it.
Palantir is a different company today than it was a year ago.
Earnings per share and revenue are consistently beating analyst expectations. In addition, Palantir’s management is now issuing forward-looking guidance that is better than Wall Street’s expectations.
Put simply, Wall Street is on the wrong side of the Palantir trade, which is likely to help shares over the next 3-6 months.
Just weeks ago, Alex Karp, CEO of Palantir, was interviewed on CNBC and the subject of Wall Street’s expectations came up.
The CEO expressed the relationship between Wall Street and Palantir with this quote…
“People have been saying we are overvalued for 20 years. People have been saying our products wouldn’t make us profitable. That we would not be able to become a juggernaut. That we would not become GAAP profitable. That we wouldn’t get on the S&P. Keep saying that about us. We love it. It discourages people from doing anything like what we’re doing. And we are winning.”
In the early 2000’s Apple shares were similarly under loved by Wall Street analysts. Fewer than 50% of the analysts covering the stock had a “buy” recommendation on it.
At the time, Steve Jobs was in the process of evolving the company’s products to catch up with the likes of Microsoft, Intel and Cisco. At the same time, Microsoft was the most loved stock by Wall Street with 94% of analyst’s ranking it a “buy”.
Apple’s plan worked, and it took Wall Street analysts a year to identify that the company’s fundamentals were inline with the valuations that investors were placing on the stock.
What followed were an avalanche of analyst upgrades and raises to Wall Street’s price targets.
Apple shares rallied more than 400% over the following two years as Wall Street caught up with the company’s real value.
The kicker, Microsoft shares traded relatively flat during the same two-year period. It had been the most recommended stock by analysts.
Alex Karp is right to point out the disparity between Wall Street’s outlook and Palantir’s price. One will have to move to the other, and right now Wall Street is being left behind.
For the third quarter in a row Palantir’s management has raised their guidance. That’s a trend.
The improved view of the company comes as they continue signing contracts with the public and private sector, exactly as the company planned.
Expect to see Wall Street adjust their view on the stock over the next two months, ahead of Palantir’s next earnings call on February 12.
One thing that is a sure as the sun is coming up, Wall Street analysts like to move as a group. When a few analysts blink to upgrade the stock, the rest will start to follow.
That shift in sentiment will push Palantir shares higher up the “wall” as more and more investors start piling into the stock.
Newly minted highs of nearly $64 per share will be far in the rearview mirror as Palantir strikes its way towards a price target of $100. All thanks to Wall Steet’s shift to being buyers of the stock.
As always, the simplest trade here is a buy and hold strategy.
Palantir shares are likely to start outperforming companies like NVIDIA, Microsoft and Google over the next 2-5 years as AI services are now harnessing the power of AI created by those companies.
Options investors may consider using a LEAPs strategy to leverage the expected move.
January 15, 2027 calls remain relatively inexpensive and a simple way to diversify a long-term AI portfolio for those with the education and background to trade options.
