5 Artificial Intelligence (AI) Stocks That Are Far Better Buys Than Palantir

Key Points

• AI hardware plays like Broadcom and Nvidia still make for great buys.

• Chip production must increase to meet the demand for AI.

• Alphabet is emerging as one of the leading players in generative AI.

• 10 stocks we like better than Taiwan Semiconductor Manufacturing ›

Palantir Technologies (NASDAQ: PLTR) has been on an impressive run over the past few years. The stock is up 2,570% since the start of 2023, making it an even better performer than Nvidia (NASDAQ: NVDA) over that timeframe. While that share price performance is great, the business is note growing at quite that pace and Palantir's stock may have gotten ahead of itself. As a result, there are plenty of stocks that look like far better buys than Palantir right now.

I've identified five companies that investors might want to consider before Palantir, and there's one glaring reason why any of this group of five stocks is a far better investment.

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Image source: Getty Images.

Palantir's stock has gotten ahead of itself

Palantir's AI software has seen significant growth recently, driving Palantir's 48% year-over-year revenue increase in Q2. I wouldn't be surprised to see the growth rate accelerate through the end of the year, but it will take a lot more than that to justify Palantir's stock price.

Although the stock price has increased 25-fold since the start of 2023, its quarterly revenue has only risen by 81%. This suggests that nearly all of Palantir's stock performance can be attributed to its valuation rising, which becomes evident when examining its valuation multiples.

At 126 times sales and 267 times forward earnings, Palantir is one of the most expensive stocks in the market.

Data by YCharts.

It's rare for any stock to trade in the triple-digit price-to-sales (P/S) ratio range, let alone one that isn't doubling or tripling its revenue year over year, yet that's where we find Palantir. Palantir's stock has years of growth baked into the stock price, which will impede future returns. As a result, I think AI investors should consider other options, especially those with more reasonable valuations.

The market is full of promising AI investment opportunities

There are multiple ways to invest in the AI arms race, but my preferred approach is through companies that provide the computing hardware necessary to power AI computing. Chief among these are Nvidia and Broadcom (NASDAQ: AVGO). Nvidia manufactures graphics processing units (GPUs), which are utilized for training and running AI models. Its GPUs are responsible for almost all of the AI technology we utilize today, and it will remain a top choice in the future.

Broadcom is also making a name for itself in two areas. First, its networking switches help stitch back information that is calculated across multiple computing units. Second, its custom AI chips, which are designed in collaboration with an end user, are starting to challenge Nvidia's computing dominance. Both companies will continue to be excellent AI investments as AI infrastructure spending ramps up.

Another important field in the hardware space is chip fabrication. My favorite fabricator by far is Taiwan Semiconductor Manufacturing (NYSE: TSM). TSMC manufactures chips for Nvidia and Broadcom, as they lack the in-house capabilities to do so. It has a long track record of continuously innovating and producing the world's most powerful chips, and an investment in TSMC is a bet that we're going to need more advanced chips in great quantities in the future (which is a safe bet).

Another company along the same lines as TSMC is ASML (NASDAQ: ASML). ASML manufactures extreme ultraviolet lithography machines, which are required in the chip manufacturing process. ASML is the only company in the world with this capability, making it a technological monopoly. As more chip foundries are built to handle the massive demand for AI-related equipment, ASML is expected to continue growing.

Lastly, I like Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), which is both a hardware player (through its cloud computing service) and an AI developer (with its leading AI model, Gemini). The market has doubted Alphabet since it fell behind at the start of the AI arms race, but it has quickly found its running legs and is back in the AI race, and is a strong bet to continue being a market leader.

Data by YCharts.

A look at their valuations shows that all five of these companies are far better buys than Palantir, and investors should consider this group first.

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Keithen Drury has positions in ASML, Alphabet, Broadcom, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Alphabet, Nvidia, Palantir Technologies, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.