There's no doubt about it. Palantir (NASDAQ: PLTR) was one of the biggest success stories in the stock market in 2024.
With one day left in the calendar year, Palantir stock is up a whopping 349% for the year.
Just about everything has gone right for the software stock. Its revenue growth has accelerated over the past several quarters, and its operating margin has also expanded. Along the way, the company has gained admission to the S&P 500 and the Nasdaq-100. The company seems to have transitioned from a niche data fusion company serving primarily government customers to one being rapidly embraced by commercial customers for both artificial intelligence (AI) and broader uses.
However, along the way, Palantir's valuation has gotten significantly inflated. Even after a modest pullback, the stock now trades at a sky-high price-to-sales ratio of 72. That means that even if its profit was as high as its sales, it would still be twice as expensive as the S&P 500. That puts a lot of pressure on the stock to keep gaining from here, as the stock is likely to fall if its growth slows down.
For investors, there are better stocks to buy over the next five years. Keep reading to see two of them.
Image source: Getty Images.
1. Axon Enterprise
Axon Enterprise (NASDAQ: AXON) has also delivered a blockbuster 2024, with the stock up 134% through Dec. 30, and it's benefited from similar trends to Palantir.
Like Palantir, Axon is also expected to benefit from policies from the incoming Trump administration. Axon is a law enforcement technology company that makes Taser stun guns and body cameras as well as a cloud software platform that helps law enforcement agencies manage things such as evidence and records. Investors expect spending on law enforcement activity to increase under Donald Trump because of proposals such as mass deportation, and Axon figures to be a winner.
The stock gained 4% the day after the election and then jumped the following week on a strong beat-and-raise earnings report.
At a market cap of $46 billion, Axon is much smaller than Palantir, which is currently worth $175 billion, but a lot can change over five years, and Axon is also tapping into the power of AI, showing its knack for innovation in an industry it now dominates. It even formed Axon AI in 2017, showing it was ahead of the technology curve.
Earlier this year, it introduced Draft One, an AI-powered tool, that generates draft reports directly from body camera footage, saving officers valuable time. Investors should expect similar advances from Axon over the next five years, driving revenue and profit higher.
Axon is expensive, trading at a price-to-sales ratio of 24.3, but that's still much cheaper than Palantir. With a clear path to growth and margin expansion, Axon still looks primed for solid growth over the next five years, while Palantir seems likely to face significant multiple compression. By 2030, I think Axon will be the more valuable company.
2. MercadoLibre
Another longtime winner in the market is MercadoLibre (NASDAQ: MELI), a Latin American e-commerce and digital payments company. The stock is up nearly 6,000% since its 2009 IPO, having delivered consistently strong growth.
MercadoLibre has followed a similar path to Amazon, developing a core business as a direct e-commerce retailer before layering on higher-margin businesses such as digital payments, a third-party marketplace, point-of-sale devices for brick-and-mortar merchants, advertising, and other features that include a delivery service, called MeracdoEnvios; asset management, called MercadoFondo; and a consumer lending business, called MercadoCredito.
MercadoLibre's competitive advantages are evident in its rapid growth, its expanding margin, and the fact that it has withstood competition from giants like Amazon and Sea Limited's Shopee.
Looking ahead, MercadoLibre still has a lot of whitespace opportunities in Latin America as it penetrates core markets including Brazil, Mexico, and Argentina and expands elsewhere in the region.
The stock now has a market cap of $87.3 billion, making it a reasonable candidate to overtake Palantir over the next five years at half of Palantir's current valuation. MercadoLibre is also much cheaper, at a price-to-sales ratio of just 5, and price-to-earnings ratio of 61.
Considering that its revenue jumped 35% in the third quarter, the stock has a lot of room for growth if it can maintain its momentum over the next five years.
Should you invest $1,000 in MercadoLibre right now?
Before you buy stock in MercadoLibre, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and MercadoLibre wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $823,000!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon, Axon Enterprise, and MercadoLibre. The Motley Fool has positions in and recommends Amazon, Axon Enterprise, MercadoLibre, Palantir Technologies, and Sea Limited. The Motley Fool has a disclosure policy.
