Palantir vs. Adobe: Wall Street says to buy one AI stock and sell the other

The most popular stock in the field of artificial intelligence (AI) software is without a doubt Palantir (PLTR 2.98%). Shares are up 160% this year and are outperforming the software company most want when they grow: Adobe (ADBE 0.18%).

Adobe’s stock is down 15% this year, but it’s also part of the AI ​​conversation because it’s heavily pursuing the AI ​​image generation market as well as AI video. However, despite Palantir’s fantastic year and Adobe’s lackluster one, Wall Street believes investors would be wise to sell Palantir and buy Adobe.

Why? Well, the answer centers around value.

Both companies have an AI investment case

Palantir’s AI platform is designed to give anyone with decision-making power the most up-to-date information possible. It involves processing multiple streams of data simultaneously and then harnessing the power of AI to make recommendations. Initially, this software was designed for government use, but has also made its way into the commercial sector.

More recently, Palantir’s new product, the Artificial Intelligence Platform (AIP), has gained momentum. AIP allows companies to to build generative AI into their business systemsthat transforms AI from a tool that someone can use on the side to one that is integrated into workflows. This is a critical step because it controls what information a large language model sees and prevents sensitive information from entering another company’s database.

Adobe is not as technologically advanced as Palantir. Its suite of products is the industry standard for graphic design, but Adobe isn’t sleeping at the wheel. It added Firefly to its product line, allowing creators to adjust images or create new ones with text input. However, many generative AI models already have this capability, so Firefly does not differentiate it.

Few models can generate AI video, but Adobe is getting closer to the large-scale release of Firefly Video. With Adobe at the forefront of this fundamental change in the way people work, it is in no danger of being replaced anytime soon. However, the stock doesn’t get as much respect as it used to.

Both Palantir and Adobe have legitimate investment cases and are strong AI companies. However, Wall Street is much more bullish on Adobe than Palantir, and I agree.

Palantir is priced way too high for its growth

Wall Street currently has an average price target of $27.67 on Palantir stock, indicating a downside of about 35%. Adobe’s one-year average target is $621.15, indicating an upside of about 25% (both consensus targets are from TipRanks).

Why the big discrepancy? They have to deal with the evaluation.

While Palantir may grow faster than Adobe, the price to pay for that growth is too high for many investors.

Operating Revenue PLTR (Quarterly Yearly Growth) given by YCharts

Palantir currently trades with a an incredible 41.1 times sales. For comparison, Adobe trades 41.6 times his earnings. This is a huge discrepancy because investors care about earnings once a company fully matures.

To illustrate how expensive Palantir is, let’s calculate how much growth it would need to reach Adobe’s valuation.

In Q2, Palantir grew revenue 27%, and management expects Q3 revenue to grow 25%. But for argument’s sake, let’s say it can grow between the two projections (26%) for five years. That’s probably longer sustained growth than Palantir can sustain (Wall Street thinks it will grow revenue at a 21% pace through 2025), but it’s what’s needed to get the result the stock is priced for.

Additionally, let’s assume Palantir can improve its profit margin from its current 20% to Adobe’s 30%. This is a much more reasonable projection, as Palantir has consistently improved its margins in recent quarters.

If it does both, Palantir stock would generate $2.36 billion in profits five years from now, giving it a 40.7 times trailing earnings valuation.

That’s with zero change in the share price today. So if you think Palantir will be a better stock to own over the next five years, Adobe’s price should fall.

I think it’s a terrible bet because Adobe has shown a knack for growing consistently at a teenage pace every year.

Owning Palantir instead of Adobe doesn’t make much sensebecause the expectations contained in the stock are outrageous. While Palantir is a brilliant AI stock, you’d be better off owning the master that continues its steady, year-over-year market-beating trajectory.