In this article, we evaluated two technology stocks: Palantir Technologies (PLTR) and Alphabet (GOOGL). A closer look reveals that we have a neutral view on Palantir and a bullish view on Alphabet.
Palantir Technologies specializes in big data analytics, while Alphabet is the holding company that owns the Google search engine and sells apps and content on Google Play and YouTube. Alphabet also generates revenue from cloud service fees, licensing revenue, and hardware products such as devices like Chromebooks.
Palantir shares have soared 80% so far this year and have more than doubled, rising 111% last year, while Google shares are up 19% this year and 27% over the past 12 months.
With such a large difference in year-to-date returns, it's not surprising that there is a large difference in the valuations of the two companies. We compare the price-to-earnings (P/E) ratios of the two companies to assess their valuation relative to each other and the software industry.
By comparison, the technology industry's price-to-earnings ratio (P/E) is 46.3, compared with an average of 39.3 over the past three years.
Palantir Technologies
Palantir Technologies' price-to-earnings ratio of 182.3x appears significantly overvalued relative to the broader industry. The company's forward price-to-earnings ratio of 80.3x is much more attractive, but the stock is currently out of reach and a neutral view may be appropriate until a more attractive valuation emerges.
Palantir Technologies Inc., a stock that primarily deals in cloud and software-as-a-service, has seen its valuation soar this year, fueled by the potential of artificial intelligence. The company raised its full-year revenue outlook for the second time this year in early August, citing the strength of its AI platform.
Palantir is essentially where Alphabet and Google were a few years ago: Palantir can do no wrong, and investors are happy to push its valuation to infinity. But Palantir is not Alphabet yet, so at some point things are going to have to slow down, so I feel a wait-and-see approach is best for now.
In fact, investors who hold Palantir shares may want to consider locking in some profits now in anticipation of an inevitable decline in the stock price. For now, patience is the key when it comes to Palantir stock.
What is your price target for PLTR stock?
Palantir Technologies has a consensus rating of Hold, based on 3 Buy, 5 Hold, and 6 Sell ratings in the past three months. Palantir's average price target is $25.42, suggesting a downside potential of 17.97%.
See more PLTR analyst ratings
alphabet
Alphabet's price-to-earnings ratio of 24.2x hasn't been this low since March, suggesting that this may be a good time to buy this blue-chip stock cheap. So a bullish view seems appropriate, especially since this is one stock investors will want to consider buying and holding for the long term.
In its most recent quarter, Alphabet's quarterly cloud revenue exceeded $10 billion for the first time, accounting for more than a third of its total revenue of $84.7 billion. So while Alphabet offers diversified exposure to a wide range of technology sectors, it remains heavily reliant on the cloud.
Alphabet's stock hasn't been this cheap since March, but if we look at its valuation since October 2019, we can see that it's trading at a trough of about 29x earnings, its most recent peak in July. Also, the company's stock has been trading near the low to middle of its P/E range since October 2019. Alphabet's P/E has ranged from about 17x earnings in November 2022 to 39x earnings in April 2021.
Therefore, now is a great time to buy Alphabet shares, or at least add to an already established position.
Looking back at Alphabet's long-term stock appreciation, we can see why it's a great buy and hold for the long term. The company has earned its status as a blue chip stock, which is why it's a great buy and hold.
Additionally, Alphabet's stock price is up 15% over the past three years, which is tough times for tech stocks in general. The stock price is up 183% over the past five years and 463% over the past 10 years, showing that Alphabet's overall trend is up and to the right, even during tough times for the tech sector as a whole.
What is your price target for GOOGL stock?
Alphabet has a strong buy consensus rating based on 28 buy, 7 hold, and 0 sell ratings in the past three months. Alphabet's average price target is $205.03, suggesting an upside potential of 24.50%.
See more GOOGL analyst ratings
Conclusion: PLTR is Neutral, GOOGL is Bullish
Palantir could be a stock worth buying and holding in the long term, but its current valuation is simply overstretched. Like Alphabet, Palantir has delivered impressive three- and five-year gains, but the last time the stock price exceeded $30 per share in February 2021, a correction quickly followed. Thus, investors should be wary of volatility in the near future.
It's important to note that Palantir Technologies is valued as a growth stock, while Alphabet's stock has moved into value or blue chip territory. However, Alphabet's status as a blue chip makes it too cheap to ignore right now. So, when we review the valuations of both companies, we see that Alphabet is the clear winner in this combination.
Disclosure
