Palantir is among the best-performing shares of 2024, however I query if the corporate can sustain this degree of momentum.
Two of this yr’s hottest shares are each darlings of the factitious intelligence (AI) motion. Information analytics software program developer Palantir Applied sciences (PLTR 6.22%) and cybersecurity specialist CrowdStrike (CRWD 0.22%) have been within the highlight for a lot of 2024 — albeit for a lot completely different causes.
Whereas Palantir has finally proven that it’s a rising star within the enterprise software program area, CrowdStrike’s status took a serious blow earlier this yr after a glitch in its platform induced unprecedented outages for a lot of of its clients.
However, I stay bullish on CrowdStrike’s long-term narrative — a lot in order that I feel the corporate may very well be price greater than Palantir by the following decade.
Under, I’ll illustrate Palantir’s speedy ascent to the highest of the AI software program realm and break down how CrowdStrike may emerge because the extra worthwhile firm in the long term.
A have a look at Palantir’s rise and hovering valuation
On the time of this writing, Palantir inventory has gained 287% in 2024 and is the second-best performing inventory within the S&P 500.
The first driver behind Palantir’s surge is immense demand for its Artificial Intelligence Platform (AIP) software program. Till the discharge of AIP, Palantir was extensively regarded by skeptics as a consulting operation for the federal authorities with restricted software program capabilities. However during the last yr, Palantir has flipped that narrative proper on its head.
During the last 12 months, Palantir has elevated its buyer depend by 39%. But extra impressively, the corporate has swiftly penetrated the personal sector, rising its industrial buyer depend by over 50% for the trailing-12-month interval ended Sept. 30.
The apparent advantage of elevated buyer counts is accelerated income. However what makes an funding in Palantir much more particular is the corporate’s potential to develop margins and start producing constructive free money circulate and web revenue in tandem with rising income.
All of those components make Palantir appear like a no brainer funding alternative… that’s, till you check out the chart under.
PLTR PS Ratio knowledge by YCharts
The clear outlier within the chart above is that Palantir’s price-to-sales (P/S) ratio of 65 just isn’t solely the very best amongst this cohort, however is sort of triple the following closest comparable enterprise. Whereas it may be argued that Palantir deserves a premium a number of, the inventory has skilled outsize valuation expansion throughout an in any other case quick time interval. Candidly, I feel it is this very dynamic that’s inflicting some hedge funds to materially trim their exposure to Palantir and take income.
Picture supply: Getty Photos.
A have a look at CrowdStrike’s resiliency
I will get the apparent level out of the best way up entrance: CrowdStrike is by no means an inexpensive inventory. Even with the fabric sell-off that was pushed by the safety outage over the summer season, the inventory nonetheless trades at a significant premium above its friends.
CRWD PS Ratio knowledge by YCharts
However, I see some key variations between an funding in CrowdStrike and one in Palantir.
As I beforehand explored, CrowdStrike was in uncommon firm a couple of years in the past through the peak of the COVID-19 pandemic. The truth is, demand for CrowdStrike’s products actually rose during the COVID-19 recession. I see two causes for this. The apparent cause is that work-from-home protocols turned the norm throughout peak pandemic days. As such, companies wanted to double down on cybersecurity protocols on work-issued units throughout this part of distant work.
Nevertheless, taking this a step additional, I might argue that CrowdStrike is positioned effectively throughout nearly any financial cycle as a result of investment in cybersecurity is increasingly becoming a non-negotiable.
In different phrases, whereas knowledge analytics is necessary, Palantir’s worth proposition turns into tougher to justify throughout powerful instances when budgets are tight. In my eyes, the identical can’t be stated for cybersecurity.
The underside line
CrowdStrike’s safety outage incident occurred on July 19. A couple of month later, the corporate reported earnings for its second quarter of fiscal 2025 (ended July 31). To me, a very powerful determine in that report was annual recurring income (ARR), which clocked in at $3.9 billion.
Quick ahead to Q3, when CrowdStrike ended the quarter with simply over $4 billion in ARR.
Regardless of any reputational harm from the outage, CrowdStrike has nonetheless managed to develop its ARR during the last two quarters. I feel it is a testomony of the corporate’s superior merchandise, and the heavy reliance its clients have on CrowdStrike’s safety spine.
On the finish of the day, I feel each Palantir and CrowdStrike are dear shares. Nevertheless, Palantir’s valuation is stretched and the inventory is overbought. As such, the corporate has to show that it will possibly develop into this premium valuation — which will likely be no simple feat given how intense the enterprise software program panorama is. Over time, it may grow to be more difficult to compete with current software program suppliers even when Palantir does have the superior product. Palantir’s potential to scale in the long term may all boil right down to pricing in comparison with competing platforms.
In contrast, I feel companies are going to proceed rising funding in cybersecurity as threats of fraud and ransomware rise and grow to be extra subtle. Given CrowdStrike’s confirmed potential to develop throughout troublesome financial instances comparable to recessions in addition to difficult business-specific durations (i.e. the outage), I feel the corporate is positioned to speed up gross sales, develop margins, and compound income over the following a number of years.
For these causes, I feel CrowdStrike has a greater likelihood of experiencing an expanded valuation from present ranges and will surpass that of Palantir ought to the software program developer present any signal of protracted progress.
Adam Spatacco has positions in Palantir Applied sciences. The Motley Idiot has positions in and recommends Atlassian, CrowdStrike, Datadog, Fortinet, MongoDB, Okta, Palantir Applied sciences, ServiceNow, Snowflake, Workday, and Zscaler. The Motley Idiot recommends Palo Alto Networks. The Motley Idiot has a disclosure policy.