The high-flying AI stock could come down to earth as these two titans overtake its market share.
Palantir (PLTR -1.49%) has rapidly ascended to become one of the biggest artificial intelligence (AI) companies in the world.
After climbing 1,760% since the start of 2023, the company now has a market cap of around $280 billion as of this writing. That soaring stock price has been supported by improving financial results. The company is showing strong revenue growth and improved operating leverage as it scales.
Only a handful of companies can boast bigger market caps than the AI darling today. But one year from now, investors looking at Palantir may have been better off investing in one of two smaller companies that offer even better potential than Palantir. In fact, I expect both companies will be worth more than Palantir one year from now.
Image source: Getty Images.
How Palantir became an AI giant
Palantir’s financial performance over the last two years has been extremely impressive.
Its revenue climbed 50% from 2022 levels by 2024. It saw particular strength in U.S. commercial revenue, which more than doubled. Management expects revenue to climb another 34% this year. Driving that growth is its AI Platform, which makes it easy for anyone to use Palantir’s software to garner insights from their company’s disparate data sets.
Along with the strong revenue growth, Palantir has exhibited strong operating leverage as its costs remain stable while sales grow. Adjusted operating margin expanded from 24% in the first quarter of 2023 to 44% last quarter. As a result, Palantir became profitable on a generally accepted accounting principles (GAAP) basis last year and joined the S&P 500.
But investors have bid up Palantir much faster than its financials have improved. The stock now trades for an enterprise value more than 70 times its expected 2025 sales. Even with its strong margin expansion, the stock’s forward price-to-earnings (PE) ratio is more than 200. To say Palantir’s stock is expensive might be an understatement. As such, any misstep, disappointing earnings report, or news that negatively impacts the company could send shares tumbling lower.
These two companies look like much better values, and they could overtake Palantir’s market cap within a year.
1. ServiceNow
ServiceNow (NOW 0.62%) has historically grown through its land-and-expand strategy. After introducing a best-in-class IT service management solution, it expanded to IT operations management. From there, it started offering software for HR, customer service, finance, and operations. As a result, it’s seen very strong customer retention and net retention rates. It consistently sees 98% of customers renew their contracts.
In 2023, the company introduced new generative AI capabilities across its suite of software, and it’s seen strong uptake from its customers so far. Management says it already has over $250 million in annual contract value tied to its Now Assist AI product. It expects that number to top $1 billion by the end of next year. With $10.3 billion in current remaining performance obligations, AI is a significant growth driver for the business. More importantly, it gives customers yet another reason to stay subscribed and expand their business with ServiceNow.
The company sees a lot of room for growth. It expects subscription revenue to grow from $10.6 billion last year to more than $15 billion next year. Meanwhile, it sees adjusted operating margin expanding by 100 basis points per year for the next two years, reaching 32.5%. And there’s a lot of long-term growth potential still as its addressable market is both large and growing. Two years ago, it estimated the potential of 200 marquee customers was $17 billion. Today, with the addition of new services, it thinks it exceeds $30 billion.
While ServiceNow isn’t growing as quickly as Palantir, it’s still growing nearly 20% per year and exhibiting the operating margin expansion you’d expect from a software company. Its big backlog of contracts and ability to retain revenue while attracting new customers should provide a long runway of revenue growth. While the stock looks expensive at an enterprise value of about 15 times management’s outlook for 2025 sales, it trades far below the multiple of Palantir.
It’s not unreasonable to expect ServiceNow to maintain its valuation a year from now. With management’s outlook for over $15 billion in subscription revenue and another $500 million or so in other revenue, the company could be worth $240 billion by this time next year.
2. Uber
Uber (UBER 0.63%) has seen its stock weighed down by concerns over how autonomous vehicles (AVs) could impact its business. The company is making the case that it’s the ideal partner for self-driving cars. It’s announced partnerships with multiple AV companies to deploy a fleet of their vehicles in select cities around the world. It most recently launched Waymo vehicles in Austin with 100 vehicles. Management said those vehicles completed more rides than 99% of all drivers in any given day.
Over the long run, AVs could be a driving force for broader adoption and use cases for Uber by driving the cost to serve lower. With a network of over 170 million riders around the world, Uber is the demand aggregator for ride-sharing, putting it in the leading position to forge strategic partnerships with more AV companies. That’s a huge long-term advantage.
In the near term, however, Uber’s seeing very strong leverage in its operations. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin expanded to 16.2% last quarter from 13.6% a year ago. Free cash flow climbed to $2.25 billion, up 66% year over year. Both should continue to climb as it scales the business, remains disciplined with its capital allocation, lowers its customer acquisition costs, and increases its customer lifetime value. Management touted customer retention rates at or near their all-time highs around the world in Q1.
Over the next two years, management sees adjusted EBITDA approaching $10 billion thanks to steady revenue growth and operating leverage. Unlike the high-priced software stocks, Uber trades for an enterprise value just 3.5 times 2025 sales estimates. With lower margins and slower revenue growth, Uber deserves a lower multiple, but its current valuation looks very attractive. Its forward PE of about 29 while the company is growing its earnings at nearly 30% per year. With some valuation expansion, the stock would be worth about $225 billion by this time next year.
If Palantir comes down in price as many Wall Street analysts expect, both ServiceNow and Uber could end up being worth more than the fast-moving AI stock within a year.
