2 Top Artificial Intelligence (AI) Stocks to Watch in October

The launch of OpenAI’s ChatGPT in late 2022 increased interest in companies that could support or monetize generative AI. Nvidia (NVDA 1.69%) And Palantir Technologies (PLTR 1.96%) are two great examples. Let’s examine the pros and cons of both stocks to decide whether they have a place in your portfolio in October and beyond.

1. Nvidia: the hardware leader

With shares up a whopping 160% in the last 12 months, Nvidia remains one of the biggest beneficiaries of the AI ​​hype cycle. And unlike some other alternatives, its rally is supported by equally impressive operating results.

To say business is booming might be an understatement. SecoIn Q2 (ended July 28), revenue rose 122% year-over-year to $30 billion, based on massive demand for its high-end products Graphics processors (GPUs) used to run and train AI algorithms. The company’s technological moat allows it to sell its hardware at a huge premium (with a gross margin of 75%), helping its operating income rise 174% to $17.6 billion.

But despite the strong results, the company is a leader in a speculative and unproven industry. Large language models (LLMs), like ChatGPT and Google Gemini out of alphabet are full of errors. And due to open source competition, it will be difficult to monetize them. If tech giants stop investing in their often unprofitable AI projects, Nvidia’s operational momentum could disappear as quickly as it seemed.

That means, with a Forward price-earnings multiplier (P/E ratio) of just 31, Nvidia stock is relatively cheap given its epic growth. The market appears to be waiting for the software side of AI to show more results before triggering the company’s next bull run.

2. Palantir: a software contender

While Nvidia focuses on the hardware side of AI capabilities, Palantir focuses on software – combining the LLMs behind platforms like ChatGPT with proprietary data analytics and machine learning.

The company has a relatively strong moat due to its focus on sensitive government contracts. And a relatively fast-growing private company could provide much-needed growth and diversification.

For tech companies, working with the government can pose a risk to their brand image. This challenge may have led to Google abandoning a military AI project called Maven in 2019 due to employee backlash.

On the other hand, Palantir made its name through government contracts — even assisting in high-profile missions like the search for Osama Bin Laden in 2011. That niche makes it resistant to these kinds of pressures.

And clean In September, the company won a $100 million contract for the US Army’s Maven Smart System project, but Google abandoned it. Palantir also works with the governments of Israel and Ukraine on military targets.

However, while contracts are Palantir’s bread and butter, It also attracts commercial customers interested in its data analysis services.

In the second quarter (ended June 30), revenue rose 27% year over year to $678 million, helped by a 33% increase in commercial revenue to $307 million, a little less than half of total revenue. However, Palantir’s forward price-to-earnings (P/E) ratio of 87 is significantly higher than that S&P 500 Estimate of 24. And growth would have to accelerate significantly for that price to make sense.

Which stock is better for you?

Nvidia and Palantir are two top AI stocks that belong on your investing radar. However, uncertainty about the future of AI means it’s probably not the right time to bet on either company.

With a forward P/E ratio of just 31, Nvidia’s valuation appears to price in most of the risk. However, Palantir’s forward P/E ratio of 87 seems too high. And that could mean a significant disadvantage if the company doesn’t live up to high expectations.