These AI-powered enterprise software giants saw pullbacks in their stock prices, but only one is worth buying right now.
Artificial intelligence (AI) has the potential to change just about every industry under the sun, and businesses are spending heavily to stay ahead of the curb. AI-powered software can automate simple tasks while making knowledge workers more efficient and productive in their jobs. It can also help decision-makers combine relevant data points to make better decisions at a faster pace.
The enterprise AI software market is expected to grow from $98 billion in 2024 to $391 billion by 2030, according to ABI Research. Generative AI solutions, like AI agents, will grow even faster. Two companies stand at the forefront of AI-powered enterprise software: Palantir Technologies (PLTR 8.31%) and Microsoft (MSFT 2.58%).
Both stocks have soared amid the current bull market, but the recent pullback may be a buying opportunity for one of them. Here’s the better artificial intelligence stock right now.
Image source: Getty Images.
Palantir: Accelerating growth thanks to its new AI Platform
Palantir makes software that aggregates data from across an enterprise’s operations and derives actionable insights for its users. The introduction of its Artificial Intelligence Platform (AIP) made it easier for anyone to start working with its data analysis software through natural language thanks to the power of large language models. That drove an acceleration in Palantir’s results over the last two years.
Palantir saw revenue grow 29% year over year in 2024 while its adjusted operating margin expanded to 39% from 28% in the prior year. The fourth quarter saw it produce even better results for both revenue growth (36%) and profitability (45% margin). Management’s outlook for 2025 suggests revenue growth of 31% and adjusted operating margin expanding to 42%.
Palantir benefits significantly from scale as a software company with minimal marginal costs. CEO Alex Karp takes a product-first approach to building the business, focusing on making an excellent product for a few select clients with deep pockets. As the product improves and it adds more features, it becomes more appealing to a broader group of businesses. AIP has been key to expanding its usefulness for more businesses.
Palantir has two key segments: government and commercial. It started by working exclusively on challenges facing the U.S. military, and its government platform still accounts for the majority of its revenue. Government contracts are generally very sticky, which ensures a solid base of revenue for Palantir.
That said, Palantir could face headwinds amid growing geopolitical tensions and as the U.S. government looks to cut back spending. As does the rest of the federal government, the Pentagon currently faces steep budget cuts, which could negatively impact Palantir’s largest source of revenue. On the other hand, some believe the budget cuts could benefit Palantir, as it makes workers more efficient and effective, increasing the need for its software if the military reduces staff.
Amid the political tensions, Palantir looks to highlight its success outside of government contracts. Its AIPCon featured a slew of new commercial clients from around the world. As commercial clients grow, Palantir should be able to continue producing strong revenue growth and expanding its operating margin.
The big problem with Palantir stock, though, is its valuation. Even after the recent sell-off, shares trade for over 70 times its 2024 revenue as of this writing. If you use management’s 2025 outlook, the price is 55 times its projected sales for the current year. Only a handful of stocks have traded at such a massive multiple. And history didn’t side with buying them at prices comparable to Palantir’s.
Microsoft: An AI leader on two fronts
Microsoft catapulted itself to the forefront of the AI discussion when it added $10 billion to its investment in OpenAI in early 2023. Since then, it’s become a leader on two fronts of the growing artificial intelligence market: cloud computing and enterprise software.
Microsoft’s cloud computing platform, Azure, saw substantial growth over the last two years as businesses look to access compute and foundational models on the cloud to develop new AI solutions for their businesses or new AI-powered products for their customers. Management said AI services revenue on Azure grew 157% year over year in its most recent quarter, contributing to 31% overall growth in the cloud computing segment.
Management also said demand for AI services exceeded its capacity, indicating that it could grow even faster in the future. And Microsoft is certainly investing to take advantage of the opportunity. It will invest $80 billion on capital expenditures this year, mostly on AI data centers. That growing spend will support both the growing demand of its Azure cloud platform and Microsoft’s own AI development.
To that end, Microsoft developed its line of AI assistants, dubbed Copilot, for use across its various software platforms, including Github, Microsoft 365, and Dynamics 365. It also offers a stand-alone Copilot app. Businesses can also use Microsoft’s Copilot Studio to harness their own data and create their own AI agents to help them automate tasks and surface useful insights for workers. Early adoption of Copilot led to growing revenue and expanding margins for Microsoft’s Productivity and Business Processes segment.
Microsoft might not be growing as quickly as Palantir, but its stock also trades for a much more reasonable valuation for the substantial growth it does provide investors. You can currently buy the stock for less than 11 times its trailing sales. Looking at its earnings potential, shares trade for roughly 29 times analyst estimates for earnings per share over the next year. Neither is particularly cheap, but those valuations are below its average multiple since the start of 2021. A company with leadership in AI on two fronts certainly deserves a premium, and the current price is attractive for what you get.
Microsoft looks like a much better buy than Palantir stock after the recent sell-off in both.
Adam Levy has positions in Microsoft. The Motley Fool has positions in and recommends 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.
