A Stock Poised to Surpass Palantir's Market Value

Palantir Technologies has been among the top-performing stocks over the past few years, achieving remarkable gains of over 1,100% as of now, primarily due to its rapid expansion fueled by the increasing demand for artificial intelligence (AI) solutions in enterprise software.

However, such impressive growth may have led to a situation where Palantir's stock price has exceeded reasonable expectations. Currently, it trades at an astonishing price-to-sales ratio of 75, which is substantially higher than the S&P 500's ratio of 3.11. In addition, Palantir’s price-to-earnings ratio stands at 412, whereas the S&P 500 has an earnings multiple of 25.

This high valuation could pose challenges for Palantir in maintaining its upward momentum. For instance, analysts have set a median price target of $39 for the next year, suggesting a potential decline of 50% from current prices. If this target is met, Palantir's market capitalization might shrink to $90 billion from approximately $180 billion today.

While Palantir may continue to grow robustly owing to its extensive revenue pipeline, the steep valuation raises concerns about its risk-reward balance for new investors. Consequently, it could be beneficial to consider another company that is more attractively valued, showcasing strong growth and potential to surpass Palantir's market cap in the next three years.

Arm Holdings: A Rising Star

British semiconductor company Arm Holdings (ARM) made a spectacular entrance into the stock market in September 2023, more than doubling its value since then. With a market capitalization of about $135 billion, analysts are optimistic about Arm's prospects in contrast to Palantir.

Current analysis indicates a price target of $160 for Arm, projected by 42 analysts, which represents a possible increase of 24% from its current position. This trajectory suggests that Arm could surpass Palantir's valuation sooner than the three-year timeframe mentioned.

When comparing valuations, Arm's sales multiple of 39, although on the higher side, is almost half that of Palantir's. Furthermore, Arm's forward earnings multiple of 65 is significantly lower than Palantir's reading of 165. Importantly, projections indicate that Arm's earnings are likely to grow at a considerably faster rate than Palantir's over the next few years.

Understanding Arm's Competitive Edge

Arm generates revenue through licensing its technology to semiconductor manufacturers and consumer electronics businesses while also earning royalties on the chips produced using its technology.

Currently, approximately 40% of Arm’s revenue comes from the smartphone sector, with another 25% attributed to consumer electronics, cloud services, and networking. Arm boasts that 99% of smartphone application processors rely on its technology, and it has been making strides in other areas such as automotive and cloud computing.

A recent surge in demand for Arm's AI-focused architecture, Armv9, is noteworthy. This technology promises enhanced computational performance, better security, and energy efficiency. As a result, royalties from Armv9 have been rising rapidly, increasing from 10% to 25% of royalty revenue year-over-year in the second quarter of fiscal 2025.

Additionally, reports suggest that the royalty fees for Armv9 are double those of its predecessor, Armv8, contributing to a strong earnings forecast, with a projected 23% increase this fiscal year, estimating earnings at $1.56 per share.

Other indicators of Arm's growth include a 13% yearly rise in its annualized contract value to $1.25 billion during the second quarter, indicating a trend toward more lucrative contracts. Furthermore, the total number of licensing agreements has increased to 39 from 22 a year ago, hinting at additional revenue growth.

This steady expansion in licensing and revenue suggests that Arm may indeed present a more promising investment option than Palantir, not just for 2025 but potentially for the next three years. Its reasonable valuation compared to Palantir's might allow Arm to gain recognition and reward from the market as it continues to achieve healthy growth.

Palantir, stocks, Arm, AI, growth