Should You Forget Palantir and Buy These 2 Artificial Intelligence (AI) Stocks Instead?

Key Points

• Palantir's stock trades with a sky-high valuation -- better AI opportunities exist.

• Nvidia's CUDA platform strengthens its moat, helping it maintain pricing power.

• Alphabet has massive data advantages and the ability to offer deep integrations across its platforms.

• 10 stocks we like better than Nvidia ›

Artificial intelligence (AI) has the potential to transform the global economy. PwC estimates it could add up to $15.7 trillion over the next five years.

Few AI companies have captured the attention of investors quite like Palantir Technologies (NASDAQ: PLTR). Strong double-digit growth in both sales and earnings powered a huge stock rally, but that rally has also pushed its valuation to extremes. Even after a recent pullback, Palantir stock trades at more than 500 times earnings and about 112 times sales. Those numbers are hard to justify.

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In my view, Palantir stock is just too expensive. I wouldn't buy it until shares trade at a valuation connected to reality. Here are three AI stocks still worth buying instead.

1. The reigning AI champ

Nvidia (NASDAQ: NVDA) remains the clear leader in AI. Its advanced graphics processing units (GPUs) are the backbone of nearly every model and application on the market, supported by one of the largest capital expenditure cycles in history. The Financial Times recently reported that around $3 trillion will be spent on data centers in the coming years. Obviously, not all of that is going to go to Nvidia, but a good chunk will.

At the moment, its Blackwell chips are miles ahead of the competition. While Advanced Micro Devices' next generation of chips will narrow the gap, Nvidia's current update cycle means that Blackwell's successor, Rubin, will be here soon enough. The company's incredible success also means that it has the resources -- in both money and personnel -- to maintain its technical leadership.

But Nvidia's real moat isn't just its hardware. The company's CUDA software platform, which allows GPUs to perform tasks far beyond the graphics rendering they were originally made for, is a sort of foundation on which AI software is built. CUDA is so deeply embedded in AI engineering that switching from Nvidia's ecosystem would require companies to overhaul major parts of their software stacks and replace or retrain engineers -- a very costly process. The strength of this moat is part of what allows Nvidia to charge premium prices and maintain sky-high margins.

It's hard to see a future in which AI is successful and Nvidia is not, and although its stock is far from cheap, its premium valuation is justified.

Image source: Getty Images.

2. The undervalued AI pioneer

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has been a pioneer in AI for well over a decade. Its Google Brain division, which grew out of the DeepMind acquisition nearly 15 years ago, helped lay the foundation for modern generative AI. The company stumbled with its early push into consumer-facing large language models (LLMs), falling behind OpenAI's ChatGPT and taking a hit to its reputation with investors. But a lot has changed since then, and in many ways, Google has regained its technical edge.

Research and development remain its strong suit, and it's highly likely Alphabet will stay at the forefront of AI and whatever follows it. As a hyperscaler, Google Cloud provides the infrastructure that actually powers AI. It has access to one of the largest and most valuable data troves in the world -- critical for training and improving AI systems. Its products are already deeply embedded in the lives of consumers and business operations across the globe, giving it a natural pathway to integrate AI directly into services people already use effectively.

Despite all this, Alphabet stock remains one of the cheaper options in big tech.

Palantir won't outrun its valuation

Palantir is a successful company and proof positive that AI can drive real value for the companies that use it in the right way. It will continue to grow both its top and bottom lines rapidly for the foreseeable future, but it's priced for perfection, not just a high level of success.

Nvidia and Alphabet, on the other hand, are solid companies with incredible cash flows and wide moats whose stocks are priced more in line with reality. I see them as AI stocks to hold for the long term.

Should you invest $1,000 in Nvidia right now?

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.