Two of this yr’s hottest stocks are each darlings of the synthetic intelligence (AI) movement. Data analytics software developer Palantir Technologies(NASDAQ: PLTR) and cybersecurity specialist CrowdStrike(NASDAQ: CRWD) have been within the highlight for much of 2024 — albeit for much different reasons.
While Palantir has finally proven that it’s a rising star within the enterprise software arena, CrowdStrike’s status took a serious blow earlier this yr after a glitch in its platform caused unprecedented outages for a lot of its customers.
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Nevertheless, I remain bullish on CrowdStrike’s long-term narrative — a lot in order that I believe the corporate may very well be price greater than Palantir by the subsequent decade.
Below, I’m going as an instance Palantir’s rapid ascent to the highest of the AI software realm and break down how CrowdStrike could emerge because the more precious company in the long term.
On the time of this writing, Palantir stock has gained 287% in 2024 and is the second-best performing stock within the S&P 500.
The first driver behind Palantir’s surge is immense demand for its Artificial Intelligence Platform (AIP) software. Until the discharge of AIP, Palantir was widely regarded by skeptics as a consulting operation for the federal government with limited software capabilities. But over the past yr, Palantir has flipped that narrative right on its head.
During the last 12 months, Palantir has increased its customer count by 39%. Yet more impressively, the corporate has swiftly penetrated the private sector, growing its industrial customer count by over 50% for the trailing-12-month period ended Sept. 30.
The apparent advantage of increased customer counts is accelerated revenue. But what makes an investment in Palantir much more special is the corporate’s ability to expand margins and start generating positive free money flow and net income in tandem with rising revenue.
All of those aspects make Palantir appear like a no brainer investment opportunity… that’s, until you’re taking a have a look at the chart below.
The clear outlier within the chart above is that Palantir’s price-to-sales (P/S) ratio of 65 isn’t only the very best amongst this cohort, but is almost triple the subsequent closest comparable business. While it may be argued that Palantir deserves a premium multiple, the stock has experienced outsize valuation expansion during an otherwise short time period. Candidly, I believe it’s this very dynamic that’s causing some hedge funds to materially trim their exposure to Palantir and take profits.
Image source: Getty Images.
I’ll get the apparent indicate of the best way up front: CrowdStrike is under no circumstances an inexpensive stock. Even with the fabric sell-off that was driven by the safety outage over the summer, the stock still trades at a meaningful premium above its peers.
Nevertheless, I see some key differences between an investment in CrowdStrike and one in Palantir.
As I previously explored, CrowdStrike was in rare company a couple of years ago in the course of the height of the COVID-19 pandemic. In reality, demand for CrowdStrike’s products actually rose in the course of the COVID-19 recession. I see two reasons for this. The apparent reason is that work-from-home protocols became the norm during peak pandemic days. As such, businesses needed to double down on cybersecurity protocols on work-issued devices during this phase of distant work.
Nonetheless, taking this a step further, I’d argue that CrowdStrike is positioned well during nearly any economic cycle because investment in cybersecurity is increasingly becoming a non-negotiable.
In other words, while data analytics is significant, Palantir’s value proposition becomes harder to justify during tough times when budgets are tight. In my eyes, the identical can’t be said for cybersecurity.
CrowdStrike’s security outage incident occurred on July 19. A couple of month later, the corporate reported earnings for its second quarter of fiscal 2025 (ended July 31). To me, crucial figure in that report was annual recurring revenue (ARR), which clocked in at $3.9 billion.
Fast forward to Q3, when CrowdStrike ended the quarter with just over $4 billion in ARR.
Despite any reputational damage from the outage, CrowdStrike has still managed to grow its ARR over the past two quarters. I believe it is a testament of the corporate’s superior products, and the heavy reliance its customers have on CrowdStrike’s security backbone.
At the top of the day, I believe each Palantir and CrowdStrike are pricey stocks. Nonetheless, Palantir’s valuation is stretched and the stock is overbought. As such, the corporate has to prove that it may grow into this premium valuation — which will likely be no easy feat given how intense the enterprise software landscape is. Over time, it could turn out to be more difficult to compete with existing software providers even when Palantir does have the superior product. Palantir’s ability to scale in the long term could all boil all the way down to pricing in comparison with competing platforms.
Against this, I believe businesses are going to proceed increasing investment in cybersecurity as threats of fraud and ransomware rise and turn out to be more sophisticated. Given CrowdStrike’s proven ability to grow during difficult economic times akin to recessions in addition to difficult business-specific periods (i.e. the outage), I believe the corporate is positioned to speed up sales, expand margins, and compound profits over the subsequent several years.
For these reasons, I believe CrowdStrike has a greater likelihood of experiencing an expanded valuation from current levels and will surpass that of Palantir should the software developer show any sign of protracted growth.
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Adam Spatacco has positions in Palantir Technologies. The Motley Idiot has positions in and recommends Atlassian, CrowdStrike, Datadog, Fortinet, MongoDB, Okta, Palantir Technologies, ServiceNow, Snowflake, Workday, and Zscaler. The Motley Idiot recommends Palo Alto Networks. The Motley Idiot has a disclosure policy.
