Artificial intelligence (AI) is reaching its tentacles into every part of the economy; aviation is no exception. That is why Palantir Technologies(NASDAQ: PLTR) and Archer Aviation(NYSE: ACHR) are teaming up for next-generation aircraft and air taxi technologies. The companies announced a partnership this spring as both stocks catch fire, with Archer Aviation up over 200% and Palantir up close to 500% in the past 12 months.
There is a ton of excitement for investors in both of these companies today. But which is the better buy over the long-term: Palantir or Archer Aviation? Let's dig in further and find out.
Bringing AI to aviation
The Palantir and Archer Aviation are aiming to work together to disrupt the legacy players in aviation. Palantir operates one of the leading AI analytics firms for the U.S. government and big business. Archer Aviation is designing and testing one of the first electric air taxis, which promise to disrupt the transportation market once approved by the Federal Aviation Administration (FAA).
Together, the two companies are going to utilize Palantir's Foundry and Artificial Intelligence Platform (AIP) to work on software for future air traffic control and route planning. This could be important as the government and aviation leaders try to manage upcoming usage of air taxi networks in conjunction with airplanes and helicopters. Neither company has a formal timeline on what products they will release together, but it makes sense for Archer Aviation to partner up with Palantir on these tools in order to grow its air taxi network viability. Palantir likely enjoys having another customer for its AI software.
Image source: Getty Images.
Pre-revenue vs. high revenue multiple
When comparing both Archer Aviation and Palantir, it is illustrative to look at what the companies will be working on with their partnership. Archer Aviation is building future products, while Palantir is selling its existing software for Archer Aviation to use. These are companies at two different stages.
Archer Aviation is pre-revenue and still developing its Midnight air taxi vehicle, looking for certification from the FAA to start flying. It does have deals set up with companies such as United Airlines and the city of Abu Dhabi, but it has not sold a single air taxi to a customer yet. The same could be true for the next-generation aviation software it is working on with Palantir. Despite not generating any revenue, Archer Aviation sports a market cap of $6.6 billion.
Palantir, on the other hand, generates a lot of revenue. Palantir's revenue was $3.11 billion over the last 12 months, with $571 million in net income. It is signing a boatload of large contracts with United States companies. Last quarter, it closed 139 deals worth over $1 million each and 31 deals of at least $10 million. These are significant contracts that show the usefulness of Palantir's AI solutions.
The drawback to Palantir is the stock's valuation. With a market cap of over $300 billion, Palantir trades at one of the highest price-to-sales ratios (P/S) in the entire stock market at over 100 as of this writing. Even the most premier software companies typically have P/S ratios closer to 10 or maybe 20. A P/S ratio of 100 is almost unheard of and puts Palantir in rarefied valuation territory.
The stories around Archer Aviation and Palantir Technologies are exciting. Archer Aviation plans to disrupt the aviation market with air taxis lifting people above traffic, saving them time and alleviating a huge problem of modern society. Palantir brings AI insights to organizations and the U.S. government with its custom-built software platform. Together, they hope to build software to modernize the air traffic control and route-planning markets.
But which is a better buy for your portfolio? I am going to cheat and say that neither of these stocks belongs in your portfolio today. That may sound like dodging the question, but it is the only logical conclusion one can take from looking at these two stocks. Palantir trades at a P/S ratio that doesn't make sense for any stock, no matter how profitable. It simply will take years and years for the company to catch up to this valuation, similar to what happened to Shopify in 2020 and 2021.
Even if Palantir's revenue goes up by 10x to $30 billion and its net income goes up by 20x to $10 billion, it will still be trading at a price-to-earnings ratio (P/E) of 30 compared to its current market cap. That does not leave much room for stock price appreciation in the coming years.
Archer Aviation generates zero revenue. It will probably start generating revenue once the Midnight aircraft gets approved, but the stock is still way ahead of its skis when it comes to valuation. At an average price point of $5 million, even if Archer Aviation sells 100 units a year it will only be doing $500 million in annual revenue, which would be many years into the future. Manufacturing aircraft is a low-margin business, meaning this $500 million in revenue may turn into $100 million in bottom-line earnings at best. That would be a premium P/E ratio versus its current market cap of $6.6 billion.
Stay away from both Palantir and Archer Aviation. These are two exciting companies working on interesting technology, but they do not belong in your stock portfolio.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and Shopify. The Motley Fool has a disclosure policy.
