Better Artificial Intelligence Stock: Strategy vs. Palantir

Strategy (NASDAQ: MSTR) and Palantir Technologies (NASDAQ: PLTR) are both investing in the growing artificial intelligence (AI) market. Strategy -- until recently known as MicroStrategy -- has for some time been considered more of a Bitcoin (CRYPTO: BTC) hoarder than a software company, but it has been rolling out more generative AI tools for its business intelligence (BI) platform.

Palantir, which mines, aggregates, and analyzes data for government agencies and large companies, uses its AI tools to help its clients make smarter decisions. Over the past 12 months, Strategy's stock rose 65%, but Palantir's stock surged by more than 270%. Let's consider why Palantir outperformed Strategy by such a wide margin -- and attempt to figure out if it's still the better AI buy.

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Strategy's Bitcoin buys overshadow its software business

Strategy's analytics software business has barely grown over the past five years. But in 2020, the company abruptly switched its focus to the accumulation of massive amounts of Bitcoin. In the intervening years, it has built quite a hoard. As of March 16, it was holding 499,226 Bitcoins currently worth a total of $41.7 billion. That accounts for over half of the company's $77.5 billion market cap. According to Strategy co-founder Michael Saylor, the company spent a total of about $33.1 billion acquiring that cryptocurrency, or an average of approximately $66,360 per Bitcoin.

From 2024 to 2027, analysts expect Strategy's revenue -- which mainly comes from its software and services -- to grow at a compound annual rate of just 2%. They expect it to stay unprofitable until it squeezes out a slim profit in 2027.

Strategy is trying to stabilize its software business by transforming some of its on-premises applications into cloud-based services. It also launched its own customizable generative AI bot, Auto, to streamline its business intelligence services. However, those cloud and AI strategies aren't yet meaningfully boosting its sales.

Meanwhile, it's committed to spending most of its cash on more Bitcoin, and it plans to raise another $42 billion to fund that plan through 2027. Under its "21/21 plan," it will sell $21 billion in new shares and $21 billion worth of fixed-income securities. So management plans to keep diluting its investors and increasing its leverage to add to its Bitcoin hoard.

That all-in bet on crypto will continue to overshadow the potential turnaround of Strategy's software business. It's already the world's largest corporate holder of Bitcoin, and Executive Chairman Saylor has predicted Bitcoin's price will hit $13 million per token by 2045. However, Bitcoin's 20% decline in price over the past three months -- which can in part be attributed to fears of inflation and an extended period of elevated interest rates as President Donald Trump raises tariffs -- is challenging that bullish thesis.

Palantir is growing rapidly, but its valuations have overheated

Palantir went public via a direct listing in 2020. Its Gotham platform serves big government customers like the CIA and FBI, while its Foundry platform crunches data for large companies like Morgan Stanley and Airbus. From 2020 to 2024, Palantir's revenue grew at a compound annual rate of 27%. However, its growth cooled off in 2022 and 2023 as its government business grappled with lumpy contracts and its commercial business struggled to gain new customers in a tough macroeconomic environment.

However, Palantir's revenue rose 29% in 2024 -- accelerating from its 17% growth in 2023 -- and the company stayed profitable on a generally accepted accounting principles (GAAP) basis for its second consecutive year. Those rising profits led to its addition to the S&P 500 in September and the Nasdaq-100 in December.

Palantir's acceleration was driven by its U.S. commercial business, which offset the slower pace of its overseas expansion, and a big increase in U.S. government contracts as Washington worked to deal with the geopolitical conflicts in Europe and the Middle East. Palantir also expanded its Workflow Builder -- which helps its clients create their own AI-powered apps, actions, and agents across its ecosystem -- to capitalize on the growth of the AI market.

From 2024 to 2027, analysts expect Palantir's revenue and EPS to grow by 31% and 57%, respectively, even as the Trump administration continues its cost-cutting initiatives. That growth trajectory would be incredible, but Palantir stock already trades at 282 times forward earnings and 53 times next year's sales. Those nosebleed valuations could limit its upside potential even if it hits those expectations, or set it up for steep drop if there's a deeper marketwide slide or economic downturn.

Which of these stocks is a better buy right now?

I wouldn't rush to buy either of these volatile stocks in this choppy market. But as an AI play, Palantir has a brighter future than Strategy, which is more of a Bitcoin investment vehicle than an AI software stock. Instead of going all-in on Palantir, investors can nibble on it if they believe in its long-term plans -- and they should be ready to accumulate a lot more shares if it loses ground during a broader downturn. As for Strategy, the stock could be overwhelmed by its ongoing dilution and rising debt if Bitcoin stalls out or crashes. Therefore, it might make more sense for investors who want exposure to the crypto to simply buy Bitcoin directly or invest in a Bitcoin ETF instead of chasing Strategy's Bitcoin buying spree.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Palantir Technologies. The Motley Fool has a disclosure policy.