Palantir Technologies has become one of the most talked-about stocks in recent years, showcasing an astonishing rise of over 1,100% as of now. This impressive growth is buoyed by the surging demand for AI-driven enterprise software. Despite these gains, there’s a growing sentiment that Palantir’s stock might be overstretched. Currently trading at a steep 75 times its sales, it’s far ahead of the S&P 500, which has a price-to-sales ratio of just 3.11. Moreover, with a price-to-earnings ratio of 412, Palantir is far from being a bargain, especially when compared to the S&P 500’s earnings multiple of 25.
Given these figures, sustaining such a meteoric rally might prove challenging for Palantir. This is perhaps why analysts are projecting a 12-month median price target of $39 for the stock, suggesting a potential 50% drop from its present value. If this projection holds, Palantir’s market capitalization could shrink from $180 billion to around $90 billion over the next year.
There’s always a chance that Palantir could continue its upward trajectory by consistently delivering strong quarterly growth, thanks to its robust revenue streams. However, the current valuation raises questions about the investment’s risk-reward balance, suggesting investors might want to look elsewhere. One potential alternative lies with a company offering solid growth and a more attractive valuation, which could even eclipse Palantir’s market cap in the coming three years.
A closer look at Arm Holdings, the British semiconductor giant, paints an intriguing picture. Since its stock market debut in September 2023, Arm Holdings has more than doubled its value, bringing its market cap to approximately $135 billion. Unlike Palantir, market watchers expect Arm’s shares to rise even further in the next year, with a price target of $160 from 42 analysts, forecasting a 24% increase from its current standing.
Arm’s valuation does appear less daunting than Palantir’s. While its sales multiple is a substantial 39, it’s still nearly half that of Palantir. Furthermore, Arm’s forward earnings multiple is 65, considerably lower than Palantir’s 165. More importantly, Arm’s earnings are projected to outpace Palantir’s growth over the next couple of fiscal years.
What positions Arm as a strong contender is its business model, which garners revenue by licensing chip architecture to manufacturers and collecting royalties for each chip produced using its IP. This model has proven lucrative, with 40% of Arm’s revenue stemming from the smartphone sector and substantial contributions from consumer electronics, cloud, and networking.
A new catalyst for Arm is its foray into AI, with escalating demand for its AI-optimized Armv9 architecture. Arm promises enhanced computational performance, superior security, and energy efficiency, resulting in Armv9’s royalty share climbing to 25% of total royalties as of the second quarter of fiscal 2025.
Adding value, Armv9 reportedly commands a significantly higher royalty rate compared to its predecessor, Armv8—some say it’s nearly double. This price structure is anticipated to bolster Arm’s earnings growth over the following years, evidenced by a 23% increase in bottom-line figures reaching $1.56 per share in fiscal 2025.
Furthermore, Arm’s annualized contract value saw a 13% year-over-year increase in the second fiscal quarter, climbing to $1.25 billion. This indicates customers are committing to more lucrative contracts, with the demand for Arm’s licenses also on the rise.
The number of total access agreements, which allow customers entry to Arm’s comprehensive suite of IP and related tools for designing CPUs, GPUs, and other chips, increased to 39, up from 22 a year earlier. This momentum in licensing agreements not only suggests elevated licensing revenue but also foresees increased royalty income once these chips are in production.
In summary, for investors looking beyond 2025, Arm presents itself as a potentially more rewarding investment than Palantir. Its balanced valuation and growth potential offer a compelling case for it to possibly surpass Palantir’s market cap in the next three years.
