Better Artificial Intelligence Stock: IonQ vs. Palantir Technologies

The current times are exciting for technology investors. Recent breakthroughs in artificial intelligence (AI) and quantum computing could be a glimpse of a looming golden era of innovation. IonQ (NYSE: IONQ) and Palantir Technologies (NASDAQ: PLTR) have great storylines -- both are working to establish themselves as leaders in these new markets.

These stocks have already generated exhilarating returns. IonQ is up 650% since 2023, while Palantir has surged over 1,300%.

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The past couple of years might only be the beginning. Experts believe artificial intelligence could grow to become a multitrillion-dollar industry over the next decade and beyond. Which is the better AI stock to choose for the long haul? Neither is perfect, but the facts ultimately reveal a clear choice.

Two different companies, both at the forefront of AI

In a way, artificial intelligence is software that can do more than people have ever dreamed possible. AI models can now think, analyze data, and even generate written content and images. Who knows what it will do even a couple of years from now? IonQ and Palantir are pushing the bleeding edge of innovation in separate ways.

Palantir builds customer AI software applications for government and commercial applications. It takes data and analyzes it to produce actionable insights in real time. As a result, Palantir's AI software is highly adaptable to countless use cases. It can assist military missions, coordinate people and schedules, optimize supply chains, detect fraudulent activities, you name it. The company is highly profitable, its growth has accelerated since the summer of 2023, and Palantir could still be in the early chapters of a long growth story.

IonQ is racing to become a major player in quantum computing, which could eventually be crucial to unlocking AI's full potential. Quantum computers use quantum mechanics to produce capabilities far exceeding today's best supercomputers. IonQ is developing quantum computers for data centers. It's still early. Today's quantum computers are unstable and prone to errors. IonQ is racing to hone its technology and be among the first companies to bring commercially practical quantum computers to the market.

Each stock has a significant flaw

Comparing these two AI stocks is interesting because both have significant flaws despite their compelling performance over the past two years.

For IonQ, investors are putting a ton of faith into the unknown. Frankly, quantum computing isn't ready for the real world yet. CEOs like Nvidia's Jensen Huang and Alphabet's Sundar Pichai have speculated that practical quantum computing could be years away. (Huang later walked back his statement.) That helps explain why IonQ generated just $43 million in revenue last year.

Quantum computing may eventually be a massive opportunity. Still, it's unclear when the market will take off, how much IonQ will capture, or how profitable IonQ will be. At IonQ's $6 billion market cap, it's a guess as to what you're getting for your investment.

Palantir doesn't have this problem. The business generated $2.87 billion in revenue last year, and growth is speeding up. Palantir also oozes free cash flow and net income. The problem with Palantir is the price investors must pay to own the stock. Remember, even the world's best company can be a lousy investment if the valuation stinks.

The stock's past returns are impressive, but that epic run pushed Palantir's valuation through orbit. The stock's current price-to-sales ratio (80) and forward price-to-earnings ratio (167) are egregious and require years of high-octane growth or a dramatic share price decline to rightsize.

However, the superior business is clear, as is the winner in this AI stock face-off

At this point, Palantir is the superior business. Perhaps IonQ will challenge it in the future, but it seems that time may be years away.

Palantir stock's valuation is a bit radioactive right now, but the strong company behind it gives investors something to work with. Therefore, it's also the better AI stock.

That doesn't mean investors should buy shares today. The market has become shaky in recent weeks. If investors do shy away from riskier growth and technology stocks, Palantir will likely sell off harder due to that valuation. Shares have already declined nearly 25% from their high.

Palantir could drop another 50% from here, and it would still be one of the most expensive stocks on Wall Street. So, there's no rush. Formulate a plan to buy slowly as the stock declines (or the business grows) and drifts closer to a far more reasonable valuation.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.