Artificial intelligence (AI) has changed the way we look at every industry. Businesses are setting aside millions to invest in AI and remain ahead of the competition. While AI is here to stay, the AI software market is expected to keep growing at a rapid pace. It will grow faster than generative AI solutions.
Two companies at the forefront of the AI race, Microsoft Corp. (NASDAQ: MSFT) and Palantir Technologies (NASDAQ:PLTR), are soaring amid the bull market. Both are excellent AI stocks with the potential to become industry leaders. Each has different products, different clients, and a unique approach to AI. But if you had to buy one, which tech stock would you choose?
Microsoft Corporation
The market felt that Microsoft Corporation was late in the AI race, but it parked itself at the forefront with an investment in OpenAI in 2023. Today, Microsoft owns about a 27% stake in OpenAI, which is huge, considering OpenAI is aiming for a $750 billion valuation to raise money. As OpenAI succeeds, so will Microsoft. Over time, the company has also become a leader and has seen impressive revenue growth in the cloud computing segment, Azure.
The demand for Azure is growing, and Microsoft has developed new AI products and solutions for the customers. It has incorporated AI in most of its products and has seen steady revenue growth. The management stated that the demand for AI services has exceeded capacity and could grow faster in the coming years.
In the first quarter results, the company announced a revenue of $77.67 billion, up 18% year over year, and an EPS of $4.13. Its cloud segment, Azure, reported a revenue of $30.9 billion, up 40% year over year. Cloud will remain a big growth driver for the company throughout 2026.
Microsoft spent $34.9 billion in capital expenditure during the quarter, and the management plans to increase capex spending this year. At the end of the quarter, the company had a $392 billion backlog from customers. Considering the high demand, it plans to double the footprint in the data center segment over the next two years.
Exchanging hands for $459, the stock gained 7% in the past year. Goldman Sachs has a price target of $655 for the stock with a buy rating. Microsoft wouldn’t show quick highs and premium valuation; it is a stock for the long-term investor. If the company can maintain the valuation and achieve the expected growth rate, we could see Microsoft stock soar. The company is set to announce results on January 28.
Palantir Technologies
Palantir is all about big data. The company makes software that gathers and analyzes data from an enterprise’s operations and generates actionable insights for the users. The tech giant is known to be a favorite of the government and has worked on various projects for the sector.
It introduced the Artificial Intelligence Platform (AIP) that made it easier for anybody to start working on the software through natural language. The company organized bootcamps to allow users to test the software before they adopt it. AIP became a huge success and helped Palantir’s numbers accelerate.
In the third quarter, it saw a 63% year-over-year jump in revenue to $1.18 billion, and the customer count grew 45% year-over-year. It closed 204 deals worth at least $1 million and 53 deals of $10 million. Palantir manages to keep the expenses at a minimum, which allows it to see improved margins. AIP has been the key in business expansion. Palantir’s ability to lock in clients has impressed the market, and it has several government contracts to work on over the next decade.
The company closed a record-setting $2.76 billion in total contract value, up 151% year over year. While the government sector continues to remain the growth driver, its commercial sector revenue was up 121% year over year to $397 million. It reported an adjusted EPS of $0.21. Palantir has seen its revenue and profitability grow over the past four quarters.
Management has a positive outlook for the fourth quarter and is aiming for a revenue in the range of $1.327 – $1.331 billion. The only concern with Palantir is its valuation. PLTR stock is exchanging hands for $170 and has gained 133% in the past year. It is valued at a premium and is one of the most expensive stocks in the S&P 500.
The verdict
While Microsoft isn’t growing as quickly as Palantir, it trades for a reasonable valuation and could see significant upside. MSFT stock isn’t cheap, but it doesn’t have a soaring valuation. It is a tech dinosaur with strong leadership and the ability to scale. Palantir’s only concern is the high valuation. Its risk-reward ratio is skewed towards higher risk, and the stock could see a correction in 2026.
Microsoft looks like a better buy than Palantir.