Better AI Stock: Palantir vs. Microsoft

An estimated $1 trillion will be invested into expanding artificial intelligence (AI) services over the next several years in everything from graphics processors to software. Many tech companies will benefit from this massive investment, but which will be the best long-term AI stocks to own?

Let's take a quick look at two key AI players right now -- Palantir Technologies (NYSE: PLTR) and Microsoft (NASDAQ: MSFT) -- to see how each one is winning in their respective markets and which one could be the better AI stock for years to come.

Image source: Getty Images.

The case for Palantir

Palantir has spent years creating advanced AI systems that government agencies use to sift through reams of data and make the best decisions. A large chunk of its sales still come from its government contracts -- just over half -- but the company has expanded its AI footprint over the past few years into the commercial sector as well.

Commercial segment revenue jumped 33% in the second quarter (which ended June 30) and accounted for about 45% of Palantir's total sales. Why does expansion of commercial sales matter for Palantir? Because it proves that the company's AI tech is robust and can be repurposed in a rapidly expanding AI market.

Not all companies can claim that. Consider what chief technology officer Shyam Sankar said on the company's recent earnings call about its advantage over AI competitors: "[W]here the market is completely bottlenecked is on that transition from prototyping to production. And that happens to be the place that we are most differentiated."

Indeed, while others are playing catch-up, Palantir is already benefiting from years of AI investments. Management estimates U.S. commercial sales will jump 47% in 2024 to $672 million. Leadership also increased its full-year sales guidance to a range of $2.74 billion to $2.75 billion -- up about 23% from last year.

The case for Microsoft

Microsoft might not be the most exciting name in AI right now, but it's certainly one of the most important. The company has already invested an estimated $13 billion into ChatGPT creator OpenAI, and its early bet in one of the most influential AI start-ups is already paying off.

Microsoft quickly put its investment to work by integrating the underlying ChatGPT tech into its popular suite of Microsoft 365 software products, its GitHub developer platform, and Azure cloud computing services.

The biggest AI opportunity from all of this likely comes from Azure. Microsoft has the second-largest cloud computing service by market share (25% right now) after Amazon, and its new AI tools are expanding its reach. Management said on the fourth-quarter earnings call that Azure now has 60,000 AI customers, roughly 60% higher than the year-ago quarter.

Why does this matter? Because sales in the cloud computing market will grow to an estimated $2 trillion by 2030, according to Goldman Sachs. AI is driving some of that growth already, and Microsoft should benefit as more companies look to its AI cloud services to enhance their own AI offerings.

Microsoft is the better AI stock

While Palantir has lots of opportunities in the AI market, there are two reasons I think Microsoft's stock is the better option. First, it's far less expensive than Palantir's shares.

Microsoft's shares have a forward price-to-earnings ratio (P/E) of 32 right now. While not exactly inexpensive, it's far less pricey than Palantir's forward P/E of 87.

Second, Microsoft's substantial investment in OpenAI and its position in the cloud computing market mean that the company has access to some of the most advanced AI available right now and an expanding market to implement it.

With its cheaper price tag and a massive AI cloud market to benefit from, Microsoft is now likely a better long-term AI play than Palantir.

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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. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Goldman Sachs Group, Microsoft, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.