Palantir Stock vs. Microsoft Stock: Wall Street Says Only 1 Will Head Higher From Here

Palantir (NASDAQ: PLTR) and Microsoft (NASDAQ: MSFT) are two of the most popular artificial intelligence (AI) stocks in the market. Many investors have made solid profits by investing in these two giants, but it could be the end of the road for one of them.

According to the analysts' price targets aggregated from Yahoo! Finance, Microsoft has an average one-year price target of $621, compared to a stock price of $514 today. Palantir's outlook is more grim, with an average price target of $154, compared to a $178 stock price today.

That doesn't bode well for Palantir, but it is clearly a great sign for Microsoft. However, if you dig deeper, Palantir is growing at a much faster rate than Microsoft. So why do analysts prefer Microsoft to Palantir? Let's take a look.

Image source: Getty Images.

Both Microsoft and Palantir have strong growth rates

Palantir provides artificial intelligence-powered data analytics software to its clients. Originally, Palantir started as a government-focused business, but eventually expanded its offerings to the commercial sector. Its platform helps decision makers have the most up-to-date information possible, and it can also enlist the help of AI agents to automate and assist tasks normally done by humans.

Microsoft is a more familiar business, as its Office products are widely used. However, that's not all of Microsoft's business. Microsoft has a gaming platform (Xbox) and a game design studio (via its acquisition of Activision-Blizzard), LinkedIn, and its most important offering of all: its cloud computing platform, Microsoft Azure. Microsoft Azure has emerged as one of the top platforms to build AI models on, and this has led to phenomenal growth, with revenue rising 39% in Q4 of fiscal year 2025 (ended June 30). Alongside other strong points in Microsoft's business, this helped power revenue growth of 18% and net income growth of 24%. Considering Microsoft is nearly a $4 trillion company, those are impressive growth figures, but they are nowhere near what Palantir is putting up.

In Q2, Palantir delivered revenue growth of 48% year-over-year, with net income rising 33%. That gives Palantir a massive leg up in the growth department over Palantir, but that's not all that matters to investors.

The price you pay for an investment can alter future returns

Paying the wrong price for even a great company can limit upside returns. That's exactly what's going on with Microsoft and Palantir, as one has a reasonable evaluation while the other's is stretched.

MSFT PE Ratio (Forward) data by YCharts

If that chart looks odd to you, that's because it should. Palantir trades for nearly 280 times forward earnings, while Microsoft's is a far more reasonable 33 times forward earnings, although that's still not cheap historically.

This is the primary reason why Wall Street analysts are more bullish on Microsoft than they are on Palantir, as there isn't a ton of room for upside in Palantir's stock even with phenomenal growth. For Palantir to reach Microsoft's more reasonable 33 times forward earnings, it would need to grow its net income at a 50% pace for six years.

That's a long time to hold a stock just for it to return to a reasonable valuation level, and that's why I think Microsoft is a much better buy than Palantir. Wall Street analysts seem to have that opinion too, and by taking a look at valuation in conjunction with growth rates, investors can further improve their odds at picking winning stocks over the long term. Time will tell if Palantir can justify its stock price, but with such high expectations baked in, it has a long road in front of it.

Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.