Based on the average 12-month price targets set by Wall Street analysts, investors should sell Palantir stock and buy Amazon stock at their current levels.
Palantir has demonstrated a unique ability to help businesses move AI applications from prototypes to routine use, but the stock is expensive.
Amazon has strong presences in e-commerce, digital advertising, and cloud computing, and it has consistently beaten Wall Street's earnings estimates.
Palantir Technologies(NASDAQ: PLTR) and Amazon(NASDAQ: AMZN) are both heavily exposed to the artificial intelligence (AI) trend, and both are popular stocks. But forecasts from Wall Street suggest investors should sell the former and buy the latter.
Among 28 analysts who follow Palantir, the average 12-month price target is $107 per share. That implies a 23% downside from its current share price of $139.
Among 71 analysts who follow Amazon, the average price target is $239.44 per share. That implies a 12% upside from its current share price of $213.
Investors should never make decisions based solely on analysts' price targets, though. Here are the important details concerning Palantir and Amazon.
Image source: Getty Images.
Palantir Technologies: 23% implied downside
Palantir's first-quarter results were encouraging. Revenue increased 39% to $884 million, its seventh consecutive quarter of accelerating top-line growth. And non-GAAP net income increased 62% to $0.13 per diluted share. Also, management raised its full-year revenue guidance to a 36% increase, citing demand for its Artificial Intelligence Platform as a key tailwind.
Palantir specializes in data analytics software. International Data Corporation (IDC) recently ranked it as the market leader in decision intelligence platforms, and Forrester Research recognized its leadership in AI and machine learning platforms. As such, it's positioned for strong sales growth. AI platform sales are expected to increase at a 41% annualized rate through 2028, according to IDC.
However, Palantir has a valuation problem. It is the most expensive stock in the S&P 500 by a wide margin. Its current price-to-sales (P/S) ratio of 110 is more than three times higher than the next closest company, which is Texas Pacific Land with a P/S ratio of 35. Put differently, Palantir would still be the most expensive stock in the index even if its share price declined by 65%.
Admittedly, it has shown a unique ability to help customers operationalize AI -- it's effective at moving projects from prototypes to tools for everyday use. But even a strong positioning in a booming industry does not justify such a lofty valuation premium. Investors who already own Palantir should consider trimming their positions, and prospective investors should avoid the stock.
Amazon: 12% implied upside
Amazon reported good first-quarter financial results. Revenue rose 9% to $155 billion and GAAP earnings jumped 62% to $1.59 per diluted share. But management gave cautious guidance for the second quarter -- operating income is expected to land between $13 billion (which would be down 11% year over year) and $17.5 billion (which would be growth of 19% year over year).
The wide range reflects the uncertainty around how tariffs and the trade war will play out, but it could be a headwind for Amazon given that 60% of its third-party sellers have exposure to China, and those brands account for a material percentage of ad spending on the marketplace. But the company has navigated challenging economic situations before and emerged from them stronger.
More importantly, Amazon has a strong presence in three rapidly growing industries. It operates the largest e-commerce marketplace outside of China, it is the third-largest ad tech company in the world, and the largest public cloud as measured by infrastructure and platform services spending, Amazon Web Services (AWS).
Through 2030, retail e-commerce sales are projected to increase at an 11% annualized pace, digital ad spending is projected to increase at a 15% annualized pace, and cloud computing sales are projected to increase at a 20% annualized pace, according to Grand View Research. That puts Amazon on course for double-digit percentage sales growth annually through the end of the decade.
Wall Street estimates Amazon's earnings will increase at an annualized rate of 10% through 2026. Based solely on that, its current valuation of 35 times earnings looks expensive, but I think analysts are underestimating the company. Amazon has topped analysts' consensus earnings estimates by an average of 21% in the last six quarters. Long-term investors looking for greater exposure to the stock should feel comfortable buying a small position today.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon and Palantir Technologies. The Motley Fool has positions in and recommends Amazon and Palantir Technologies. The Motley Fool has a disclosure policy.
