In this piece, I evaluated two technology stocks: Palantir Technologies (PLTR) and Alphabet (GOOGL). A closer look suggests a neutral view of Palantir and a bullish view of Alphabet.
Palantir Technologies specializes in big data analytics, while Alphabet is a holding company that owns the Google search engine and sells apps and content on Google Play and YouTube. Alphabet also generates revenue from cloud services fees, licensing revenue, and hardware products like Chromebooks and other devices.
Shares of Palantir have skyrocketed 80% year-to-date and more than doubled over the last year, rising 111%. Meanwhile, Google stock has jumped 19% year-to-date and 27% over the last 12 months.
With such a dramatic difference in their year-to-date returns, the sizable gap between their valuations is no surprise. We compare their price-to-earnings (P/E) ratios to gauge their valuations against each other and the software industry.
For comparison, the technology industry is trading at a P/E of 46.3x versus its three-year average of 39.3x.
Palantir Technologies
At a P/E of 182.3x, Palantir Technologies looks significantly overvalued relative to its industry. While its forward P/E of 80.3x looks far more attractive, this stock is just a little too hot to handle right now, suggesting a neutral view might be appropriate — pending a more attractive valuation.
Though Palantir Technologies is primarily a cloud or software-as-a-service stock, its valuation has soared this year, driven by the potential of artificial intelligence. In early August, the company boosted its full-year revenue outlook due to the strength of its AI platform, marking the second time it has done so this year.
Palantir is essentially where Alphabet or Google was a few years ago. It can do no wrong, and investors are happily pushing its valuation endlessly through the roof. However, Palantir is not Alphabet yet, so things will have to slow down at some point, which is why I feel a wait-and-see approach is best right now.
In fact, investors with a position in Palantir might want to consider taking some profits now, anticipating an inevitable dip. Patience is the name of the game with Palantir stock right now.
What Is the Price Target for PLTR Stock?
Palantir Technologies has a Hold consensus rating based on three Buys, five Holds, and six Sell ratings assigned over the last three months. At $25.42, the average Palantir stock price target implies downside potential of 17.97%.
See more PLTR analyst ratings
Alphabet
At a P/E of 24.2x, Alphabet hasn’t been this cheap since about March, suggesting this may be a unique buy-the-dip opportunity in this stellar stock. Thus, a bullish view seems appropriate, especially since this is one stock investors may want to consider buying and holding for the very long term.
In the latest quarter, Alphabet’s quarterly cloud revenues surpassed $10 billion for the first time, making up over one-third of its total revenue of $84.7 billion. Thus, Alphabet is very much a cloud play, even though it offers diversified exposure to a wide range of technology sectors.
While Alphabet hasn’t been this cheap since March, a review of its valuation since October 2019 shows that it’s trading at the bottom of its recent peak in July, when it topped out at around 29x. The stock has also been trading towards the bottom to middle of its P/E range since October 2019. Alphabet’s P/E has varied from about 17x in November 2022 to 39x in April 2021.
Thus, this is an excellent time to be picking up some Alphabet shares — or at least to be adding to an already-established position.
A review of Alphabet’s long-term share-price gains demonstrates why this is one stock to buy and hold for the long term. One could argue that the company has earned blue-chip status, which is why it’s a buy-and-hold position.
Additionally, Alphabet stock is up 15% over the last three years, which has been challenging for technology stocks in general. The stock is up 183% over the last five years and 463% over the last decade, again indicating that the general trend for Alphabet is up and to the right, even during periods that are challenging for the tech sector as a whole.
What Is the Price Target for GOOGL Stock?
Alphabet has a Strong Buy consensus rating based on 28 Buys, seven Holds, and zero Sell ratings assigned over the last three months. At $205.03, the average Alphabet stock price target implies upside potential of 24.50%.
See more GOOGL analyst ratings
Conclusion: Neutral on PLTR, Bullish on GOOGL
While Palantir could become a stock worth buying and holding over the long term, its current valuation has simply gotten ahead of itself. Like Alphabet, Palantir has put up impressive three- and five-year gains, but when the stock last surpassed $30 per share in February 2021, a correction soon followed. Thus, investors should be aware of volatility around the corner.
Importantly, Palantir Technologies is being valued like a growth stock, while Alphabet stock has transitioned into value stock or blue-chip territory. However, Alphabet is just too cheap to ignore right now, especially due to its blue-chip status. Thus, a review of their valuations reveals that Alphabet is the clear winner of this pairing.
Disclosure
