Pair Trade: Fade Palantir and Buy This Exciting AI Stock

Despite facing some hurdles this year, technology and artificial intelligence (AI) stocks have surged over the past two and a half years. Among these, few companies have performed as exceptionally as the AI firm Palantir Technologies (NASDAQ: PLTR). Known for its intriguing collaborations with the Department of Defense and consistent quarterly earnings, both retail and institutional investors are rushing to acquire this stock.

Since its public debut in October 2020, Palantir's stock price has skyrocketed by an astonishing 1,105%, trading at approximately 200 times its forward earnings. As a result, the company now boasts a market capitalization exceeding $250 billion. While this meteoric rise is impressive, it may be the right time for investors to consider cashing in on their profits.

As a pair trade strategy, I suggest selling off Palantir shares and instead investing in another promising AI stock that is currently trading at a significant discount.

Palantir's Valuation: Has It Grown Too High, Too Fast?

There is no denying that Palantir is a remarkable entity. It effectively combines complex AI language models with human analysis, enabling government agencies and businesses to collect and utilize data like never before, whether for national security or optimizing business operations.

Government clients rely on Palantir's Gotham system to gather varied data from multiple sources. The AI synthesizes insights, outlines possible scenarios, and suggests actionable steps in real-time to assist in decision-making. Recently, Palantir even initiated five-day boot camps for potential business clients, guiding them to identify challenges and demonstrating how Palantir's solutions can address them. This initiative has proven to be quite successful.

Palantir recently announced stellar fourth-quarter earnings, exceeding expectations in both earnings and revenue while issuing optimistic future guidance. Following the announcement, the stock surged by another 25%. However, it is crucial for investors to remember that even exceptional businesses can operate at inflated prices, just as weaker companies might present appealing valuations.

Analyst Thill from Jefferies recently issued a research note raising his price target for Palantir from $28 to $60, yet the stock currently trades around $111 (as of February 9). Thill noted that management's revenue guidance suggests a growth rate of 31%, two percentage points more than its 2024 estimates. For Palantir to maintain its current valuation, the company would need to see a growth rate of 50% over four years while trading at 18 times its projected 2028 revenue. While it is possible for Palantir to adapt to its existing valuation, the risk-reward ratio appears to have worsened substantially, making the stock more susceptible to pullbacks.

A More Affordable AI Investment Alternative

Investors appear eager to acquire shares in any firm exhibiting signs of an AI advantage. However, the market has only recently had access to Nebius Group (NASDAQ: NBIS), an AI infrastructure provider that re-listed on the Nasdaq last October. Nebius emerged from the assets of the Russian tech giant Yandex following sanctions imposed after Russia's invasion of Ukraine.

Through a multifaceted process, Yandex ultimately spun off four AI enterprises that now make up Nebius. These include businesses operating in the fields of cloud computing, data labeling, educational technology, and autonomous vehicles, with their AI cloud service being particularly notable.

Nebius is well-positioned for AI development. Companies delving into AI require graphics processing units (GPUs), which are adept at performing massive calculations simultaneously—ideal for training large AI language models. Nebius maintains extensive infrastructure within large data centers and leases out GPU capacity to companies creating AI systems, thus allowing them to spare resources on building similar infrastructure.

Poor Valuation Versus Strong Prospects for Nebius

Nebius received a significant boost recently after raising $700 million in a private financing round, with Nvidia among the key investors. According to Nebius, clients will benefit from access to Nvidia's advanced Blackwell chips, which provides an endorsement to their growth potential.

From a financial perspective, Nebius reported close to $2.3 billion in cash and equivalents by the end of September, with minimal debt. The firm plans to invest $1 billion in AI infrastructure across Europe and aims to enhance its data center in Finland by 2026. Management believes they can reach an annual revenue run rate of between $750 million and $1 billion by the close of 2025.

Some market watchers draw parallels between Nebius and CoreWeave, another AI infrastructure enterprise rumored to be going public soon at a valuation of around $35 billion. Despite Nebius's stock jumping over 90% since its Nasdaq return five months ago, its market cap remains just about $9 billion.

Bram Berkowitz holds no positions in the stocks mentioned. The information presented here is for educational purposes, and you should do your research before making investment decisions.

Stock, Investment, AI