Better Artificial Intelligence (AI) Stock: Palantir Technologies vs. Microsoft

Palantir Technologies (NYSE: PLTR) and Microsoft (NASDAQ: MSFT) have enjoyed divergent fortunes on the stock market in 2024 so far, with one of these names recording significant gains while the other one is putting up a disappointing performance so far.

More specifically, Palantir stock has shot up 75% in 2024. Microsoft, on the other hand, is up just 8% this year, with shares of the company retreating in the past month following a promising first half.

What's worth noting here is that both Palantir and Microsoft have been counting on artificial intelligence (AI) to drive their growth. The good part is that both companies have witnessed an acceleration in their businesses thanks to the growing adoption of this technology. However, if investors have to choose one of these AI plays for their portfolios right now, which one should they buy?

Let's find out.

The case for Palantir Technologies

Palantir Technologies is helping governments and enterprises across the globe to integrate AI into their operations with the help of its Artificial Intelligence Platform (AIP), which has gained solid traction among customers. This was evident from the sharp acceleration in Palantir's growth in the second quarter of 2024.

The company's revenue increased 27% year over year to $678 million, up from the 21% year-over-year growth it reported in Q1. A closer look at some other revenue-related metrics will tell us that Palantir's growth rate could keep getting better in future quarters. For example, Palantir's remaining deal value (RDV) increased 26% year over year in Q2 to $4.3 billion. This metric refers to the total value of Palantir's contracts that are yet to be fulfilled at the end of a period.

So, the strong growth in RDV, which nearly matched Palantir's top-line jump, is an indication of the improving adoption of its software platforms. It is worth noting that Palantir witnessed a significant expansion in its customer base last quarter. The company's overall customer count increased 41% year over year in Q2 to 593.

Even better, Palantir's customers have been signing bigger deals. It closed 96 deals that were worth at least $1 million in the previous quarter. Of those, 33 deals were worth $5 million or more, and 27 deals were valued at north of $10 million. For comparison, Palantir struck 66 deals worth $1 million or more in the same period last year. Eighteen of those deals were worth $10 million or more, while 30 were valued at more than $5 million.

So, there was a nice jump in Palantir's deal size last quarter, along with a nice bump in its customer base. AI played a central role in the company's solid showing, with management pointing out on the latest earnings conference call that, "One of the most notable indicators of our delivery is the volume of existing customers who are signing expansion deals, many of which are a direct result of AIP."

Looking ahead, Palantir believes that it should be able to "land new customers and subsequently expand those engagements as we sharpen our focus to taking our customers across the chasm from prototype to production." Management provided multiple examples on the earnings call about how it is helping enterprises to deploy AIP and generate results, and that trend is likely to continue as the market for generative AI software is forecast to grow at an annual rate of 58% through 2028, generating $52 billion in annual revenue in 2028.

Palantir, therefore, has a lot of room for growth in the long run considering that it expects to clock $2.75 billion in revenue in 2024, which would be a 23% increase from last year. The company's improving revenue pipeline is an indication that it is well on its way to capturing the big opportunity in the AI software market, which is why it could continue to remain a top AI stock in the long run.

The case for Microsoft

Though Microsoft has been one of the pioneers in the field of AI thanks to its partnership with ChatGPT developer OpenAI, it looks like the market isn't giving enough love to its AI credentials. The stock has witnessed a pullback in the past month, losing 12% of its value. That's despite the fact that Microsoft announced better-than-expected results for the fourth quarter of fiscal 2024 (which ended on June 30) on July 30.

The company's revenue increased 15% year over year to $64.7 billion, while earnings jumped 10% to $2.95 per share. Analysts would have settled for $2.93 per share in earnings on revenue of $64.4 billion. Microsoft's revenue from the Intelligent Cloud business increased 19% last quarter to $28.5 billion. The company's Azure cloud services division delivered 21% year-over-year growth, of which eight percentage points were driven by the growing adoption of its AI services in the cloud.

Microsoft CEO Satya Nadella pointed out on the latest earnings conference call that the company finished the quarter with more than 60,000 customers using its Azure AI services, an increase of almost 60% from the same period last year. Nadella also added that the average spending per customer using its Azure AI services is growing.

With a 23% share of the cloud computing market, Microsoft is in a robust position to benefit from the growing adoption of AI services in the cloud. Investors should note that Microsoft is the second-largest player in the cloud infrastructure market after Amazon , which has a 32% market share. However, Microsoft has been gaining on Amazon in this market.

With the market for AI services in the cloud expected to clock annual growth of nearly 31% through 2030 as per Fortune Business Insights, generating close to $398 billion in annual revenue at the end of the forecast period, Microsoft is sitting on a huge growth opportunity. So, investors would do well to consider the bigger picture as Microsoft's growing influence in the cloud computing market, thanks to AI, could give its business a nice shot in the arm in the long run.

The verdict

Palantir is growing at a faster pace than Microsoft right now, which is why investors looking for a fast-growing AI stock are likely to be attracted to the software specialist. However, investors will have to pay a rich premium if they are looking to buy Palantir right now since it is trading at 29 times sales. Microsoft, on the other hand, is relatively cheaper with a price-to-sales ratio of 12.

A similar story unfolds looking at their earnings multiples.

PLTR PE Ratio data by YCharts

However, the chart above also indicates that Palantir's earnings are forecast to grow at a much faster pace since the gap between its trailing and forward earnings is quite big. Microsoft's earnings, meanwhile, are expected to grow at a slower pace. More specifically, consensus estimates are projecting Palantir's earnings to increase at an annual rate of 85% over the next five years, which is significantly higher than Microsoft's projected growth of 15%.

So, it all boils down to investors' risk appetite as to which one of these two AI stocks they want to buy right now. Those willing to pay a premium for a fast-growing company can consider buying Palantir, while Microsoft looks like a good option for investors who are looking for a stock that isn't expensive but can deliver steady growth in the long run.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .