“Our unchallenged ability to channel and guide the demand for integrating AI seamlessly with essential data, distribution, and decision-making structures is what truly sets us apart,” CEO Alex Karp wrote in his letter to shareholders. That confidence is undoubtedly encouraging for Palantir shareholders, but the company’s valuation has become a significant problem.

Wall Street expects Palantir to grow its adjusted earnings at an annualized rate of 27% through 2025. That makes the current valuation of 188 times earnings look absurdly expensive. Those figures give it a price/earnings-to-growth (PEG) ratio of 7, and conventional wisdom says anything trading at a PEG above 2 is expensive. Prospective investors should avoid this stock for the time being, and current shareholders should consider trimming large positions.

Dan Ives at Wedbush Securities says Nvidia is the “foundation of the AI revolution.” The company designs the most coveted graphics processing units (GPUs) in the computing industry. Nvidia accounted for 98% of data center GPU shipments in the last two years, and it has about 80% market share in AI accelerator chips. That leadership is reinforced by CUDA, a robust ecosystem of software development tools.

An article in The Wall Street Journal recently explained how CUDA contributed to the rise of Nvidia: “Year after year, Nvidia responded to the needs of software developers by pumping out specialized libraries of code, allowing a huge array of tasks to be performed on its GPUs at speeds that were impossible with conventional, general-purpose processors like those made by Intel and AMD,” wrote that newspaper’s Christopher Mims.

Nvidia reported excellent financial results in the third quarter, beating estimates on the top and bottom lines. Revenue rose 94% to $35 billion, and non-GAAP net income jumped 103% to $0.81 per diluted share. Investors have good reason to think that momentum will continue. Nvidia is currently ramping up production of its next-generation Blackwell GPUs, and CFO Colette Kress recently told analysts, “Demand is staggering.”

Looking ahead, Wall Street expects Nvidia’s adjusted earnings to increase at an annualized rate of 52% through its fiscal 2026, which ends in January 2026. That consensus makes the current valuation of 52 times adjusted earnings look quite reasonable. Those figures give a PEG ratio of 1, which makes Nvidia far cheaper than Palantir. Patient investors should be comfortable buying a position in this stock today.

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Trevor Jennewine has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.

Palantir Stock vs. Nvidia Stock: Billionaires Buy One and Sell the Other was originally published by The Motley Fool