Artificial intelligence (AI) has been the driving force behind the stock market's gains since the bottom of the recent bear market in October 2022. Breakthroughs in generative AI's capabilities created a lot of excitement about the potential of new uses for AI within businesses.
Palantir Technologies(NASDAQ: PLTR) found immense value in using AI within its data mining software and has rapidly grown the number of customers using it. That resulted in strong operating results and a soaring stock price. Meanwhile, Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL) benefited from increased investment in AI development through its Google Cloud platform while strategically integrating generative AI into its core search product. Investors rewarded the stock, nearly doubling its value since the start of 2023.
But past performance isn't an indicator of future results, as the saying goes. And Wall Street analysts only expect one of these stocks to keep climbing higher over the next 12 months.
Palantir has a median price target of $100, based on the views of 28 analysts who follow the company. That suggests a 20% downside over the next 12 months. Just six of those analysts have given the stock an overweight or buy rating.
Alphabet has a median price target of $200, based on the views of 71 analysts following it. That suggests 16% upside over the next 12 months. Of those analysts, 60 rate the stock as overweight or buy.
Here's what investors need to know.
Image source: Getty Images.
Palantir: Why Wall Street sees 20% downside
Palantir's introduction of its Artificial Intelligence Platform (AIP) helped supercharge its growth, especially among U.S. corporations. AIP makes Palantir's software more accessible to non-technical users, expanding its use cases within an enterprise. As a result, Palantir's U.S. commercial revenue rose by 54% in 2024. It topped 70% year-over-year growth in 2025's first quarter.
As a software company, Palantir exhibits extremely strong operating leverage. With its rapid revenue growth, fueled by U.S. corporations, its adjusted operating margin expanded to 44% in Q1 2025. That was up from 24% in the first quarter of 2023.
Its growth isn't expected to slow down anytime soon. Management increased its guidance for 2025 alongside its first-quarter earnings release. It now expects revenue growth of 36%, and to maintain that 44% operating margin for the full year.
But here's the problem for Palantir stock: Its valuation of more than 75 times management's expected sales is extremely high. On an enterprise-value-to-EBITDA basis, the stock trades at more than 160 times forward estimates. No other enterprise software company has a valuation that's even close to that multiple. Taking a long-term outlook for the business suggests the stock could produce lower-than-average returns for investors even if it continues to produce extremely strong financial results. Wall Street seems to be thinking the stock will face a reset at some point in the near future. Such a dip could provide a buying opportunity for investors. But right now, Palantir stock is too expensive to recommend buying.
Alphabet: More than a search engine
Alphabet stock has come under pressure over the last few months as the company faces regulatory challenges and a court ruling that it has been acting as an illegal monopoly in the search engine technology space. As a result, it may be required to divest itself of certain assets, including its Chrome browser.
Compounding that pressure is a report from Apple's Eddy Cue in early May that searches in its Safari browser are down due to increased use of AI chatbots like ChatGPT. Alphabet pays Apple roughly $20 billion a year for the right to be the default search engine in Safari (a practice the Department of Justice and the judge in the antitrust case took issue with), and it has derived a lot of value from its position in the Apple ecosystem.
But Alphabet's financial results show another story. Google Search revenue increased 10% year over year in the first quarter. That growth was fueled by Google's integration of new AI features into its core search product. Most notably, AI Overviews, which offer AI-generated answers to search queries alongside links to their sources. Management said the feature increases engagement and user satisfaction, and it's now monetizing search results with AI Overviews at the same rate as those without it. That has led to higher overall revenue. Other AI features include Google Lens and Circle to Search, which help produce more high-value product searches.
But Alphabet is more than just a search engine. It also owns YouTube, which grew its revenue by 10% in the first quarter. Its Waymo business is seeing strong momentum as it expands its autonomous vehicle ride-hailing service to new cities. It now completes over 250,000 rides per week.
Perhaps the biggest growth driver for Alphabet is its Google Cloud business. It has been a big beneficiary of the growing spending on developing AI, and Alphabet has been working to expand its data center capacity as quickly as possible. Its 28% year-over-year revenue growth in the first quarter belies the true increase in demand for its compute services. That's evident from its operating margin expansion of 8.4 percentage points to 17.8%. Based on how Alphabet's larger competitors in the cloud infrastructure space are faring, Google Cloud could enjoy a lot more operating leverage as it scales up further.
All of the uncertainty surrounding Alphabet's future, though, has pushed its valuation down to just 18.2 times forward earnings estimates. That's a great price for a company with a massive cash-flow-generating business like Google Search, a fast-growing cloud computing business, and a massive lead in the burgeoning autonomous vehicle space. It's no wonder Wall Street analysts expect the stock to climb, despite the regulatory challenges the company is facing.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has positions in Alphabet and Apple. The Motley Fool has positions in and recommends Alphabet, Apple, and Palantir Technologies. The Motley Fool has a disclosure policy.
