Optimal AI-Linked Shares: Palantir or Adobe, Reconsidered
Optimal AI-Linked Shares: Palantir or Adobe, Reconsidered
So far this year, shares of Palantir Technologies (PLTR 6.25%) have surged by an impressive 326%, contrasting the 20% drop experienced by Adobe (ADBE -2.37%). However, basing investment decisions solely on recent performance can be risky. Historical returns do not guarantee a stock's future growth potential.
Instead, it's advisable to evaluate a company's business strategy, market position, risks, and volatility before making investment decisions. Let's delve into the merits and drawbacks of both companies to determine the better investment.
Palantir's strengths and weaknesses
In the third quarter, data analytics specialist Palantir reported impressive financials, outperforming analyst expectations. Revenue increased by 30% year-over-year to $729 million, attributed largely to a 44% growth in its U.S. business. Palantir's U.S. government and commercial revenue also grew by 40% and 54%, respectively, in the same period.
Palantir's primary clientele comprises government agencies and large enterprises, using its data solutions for complex and critical applications. This has enabled the company to establish a loyal customer base. In the third quarter, its U.S. commercial client count increased by 77% year-over-year to 321. Its U.S. government business also recorded its strongest growth in 15 quarters.
Palantir's Artificial Intelligence Platform (AIP) has emerged as a key growth driver. AIP functions by utilizing multiple open-source and closed-source models and ontologies (frameworks that unify complex data sets from various sources and define their attributes and interrelationships) to assist businesses in addressing challenges such as productivity enhancement and cost reduction.
Palantir's unique sales strategy has also contributed to the widespread adoption of AIP. Rather than engaging potential clients with pilot projects that might take months for conversion, Palantir demonstrates the utility of AIP in addressing real-time challenges through rapid "boot camps." This has accelerated the conversion process. In its latest earnings call, management highlighted several large enterprises that entered into deals with seven-figure annual contract values within two months of their first boot camps.
Palantir's financial health is improving rapidly. During Q3, the company reported an adjusted operating margin of 38%, marking the eighth consecutive quarter of margin expansion, and ending the quarter with $4.56 billion in cash.
Despite Palantir's numerous strengths, its towering valuation remains a concern for investors. The company trades at 63.3 times trailing-12-month sales, significantly higher than its three-year average price-to-sales ratio of 23.2. In addition, Palantir is more exposed to government budgetary and regulatory fluctuations.
Adobe's pros and cons
Adobe, a leading creator of software, reported strong results for its fiscal 2024 fourth quarter, which concluded on Nov. 29. In this quarter, both revenue and earnings surpassed forecasts. Though Adobe's revenue growth is more moderate compared to Palantir, up by 11% year-over-year to $5.6 billion, it remains highly profitable. In the fourth quarter, non-GAAP earnings per share grew by 15% year-over-year to $18.42.
Furthermore, its outlook is promising, with remaining performance obligations (total contracted revenue from products or services that have not been delivered to clients) increasing by 16% year-over-year to $19.96 billion.
Adobe has integrated several AI tools powered by the Adobe Firefly family of models (such as Imaging, Vector, Design, and Video models) into its flagship products in the Creative Cloud, Document Cloud, and Experience Cloud segments. By the end of the fourth quarter, Firefly generations across all its tools totaled over 16 billion, helping improve the output quality and user control of creative content and document management.
Adobe has also introduced Adobe GenStudio, which combines Creative Cloud, Experience Cloud, and Firefly capabilities to manage scaled content creation in enterprises.
Adobe is now aiming to monetize its AI tools further by launching new tiered subscription offerings and add-ons to attract new users and increase its average revenue per user. The company's broad release of the Firefly Video model in early 2025 will also provide a significant opportunity, as video generation is a more valuable activity than image generation.
Adobe also boasts robust financials. Its non-GAAP operating margin was 46.3% in the fourth quarter, and it held $7.89 billion in cash and short-term investments on its balance sheet. However, Adobe trades at a relatively lower multiple of 8.6 times sales compared to its three-year average of 11.9.
After evaluating Palantir and Adobe's financial performance and growth potential, it's essential for investors to consider the risks associated with their business models. While Palantir's reliance on government contracts and significant valuation could be concerns, its strong financials, impressive growth, and innovative artificial intelligence platform make it an attractive investment opportunity for some. On the other hand, Adobe's more moderate growth and lower valuation compared to its historical average might appear more appealing to those seeking a lower risk profile in the finance sector. Regardless of the choice, a diversified investment portfolio is always advisable when investing money in the finance market.