Palantir Stock vs. TSMC Stock: Wall Street Says Buy One and Sell the Other

The global artificial intelligence (AI) market is set to grow explosively, and analysts have provided various estimates about its future size. There is great variability in the analyst estimates for global AI market size, ranging from hundreds of billions to over several trillion dollars by the end of the decade.

While the actual market size may be debated, there is no denying that AI is transforming the way we live, work, study, and play. Not surprisingly, AI has emerged as a major tailwind for many companies across industries. Palantir Technologies (PLTR -3.72%) and Taiwan Semiconductor Manufacturing (TSM -0.70%) are two such stocks that have benefited from this tailwind, and the stocks are up by around 140% and 85%, respectively, so far in 2024. Despite the solid gains, Wall Street expects Palantir stock to shed some of its gains, while Taiwan Semi is expected to rise even more in the coming months.

Palantir has an average target share price of $28.85 on Yahoo! Finance, implying a downside of almost 30% from its current share price of $41. Taiwan Semiconductor has a median target price of $217.81, implying an upside of 12% from the current price of $193.

Although price targets are not very reliable in predicting the future trajectory of any stock, they may prove indicative of the investor sentiment for the stock. Against this backdrop, here are some details to be considered before investing in Palantir or Taiwan Semi.

Palantir

As a leading data analytics and machine learning player, Palantir helps government agencies and commercial clients make sense of huge mounds of structured and unstructured data. The company's recently launched Artificial Intelligence Platform (AIP) is also proving to be a major growth catalyst, as governments and commercial clients are increasingly deploying large language models and generative AI solutions to drive efficiencies and increase productivity.

AIP differentiates itself from the competition with its unique ability to transition enterprise AI solutions from prototype to production phase at scale. This "prototype to production" transition has been a major challenge for enterprises across the world. Palantir's capability to rapidly deploy enterprise AI solutions to solve real-time business challenges is proving to be a major differentiator for the company.

Palantir's robust AI solution has helped it rapidly acquire new customers and close high-value deals. In the second quarter of fiscal 2024 (ended June 30, 2024), the company's customer count rose 41% year over year to 593. The commercial segment demonstrated exceptional growth, with the overall commercial customer count rising 55% year over year to 467 at the end of the second quarter. The company also closed 96 deals worth over $1 million in the second quarter, of which 33 were at least worth $5 million and 27 were at least worth $10 million.

Palantir's government business is also showing strength on the back of increased military investments by the U.S. and allied nations in modernizing their technology infrastructure. With an increasing demand for AI and data analytics in the defense sector, Palantir is well positioned to win new contracts and expand existing contractors with government agencies across the world.

Palantir is currently trading at a price-to-sales (P/S) ratio of 40, and price-to-earnings (P/E) ratio of 246. Analysts on Wall Street expect Palantir's revenue to grow 24% and 20.6% in fiscal 2024 and 2025, respectively. Earnings per share are also estimated to grow 44% and 19.4%, respectively, in 2024 and 2025. Looking at these growth estimates, Palantir's sky-high valuations don't seem justified, although they are healthy projections for a high-growth company. The rich valuation essentially leaves no margin of safety for retail investors.

It makes sense for retail investors to wait for a pullback before picking up stakes in this growth stock.

Taiwan Semiconductor Manufacturing

Leading independent contract foundry player Taiwan Semiconductor is also benefiting significantly from the extraordinary growth in demand for AI server processors (GPUs, CPUs, and AI accelerators) for training and inferencing models in data centers and enterprise AI applications. The company has built deep relationships with almost all AI innovator companies, including many hyperscalers who are designing their chips.

With the AI demand cycle in its early stages and Taiwan Semi focused on increasing capacity and capacity utilization at its fabs, the company is well positioned to capitalize on this tailwind. Subsequently, the company expects its server AI processor revenue to more than triple in 2024 and account for a mid-teens percentage of the total revenues.

Besides AI, Taiwan Semi is also catering to other high-performance computing (HPC) applications, including data mining and analytics. HPC use cases accounted for 51% of Taiwan Semi's third-quarter fiscal 2024 (ended Sept. 30, 2024) revenue.

Taiwan Semi has been quite successful in developing and commercializing advanced cutting-edge process technologies. The company's advanced process nodes (7-nanometer and below) are already in high demand for manufacturing complex chips, especially for AI applications. In the third quarter of fiscal 2024 (ended Sept. 30, 2024), advanced process nodes (3-nanometer, 5-nanometer, and 7-nanometer) together accounted for 69% of the company's wafer revenue (revenue earned from the sale of semiconductor wafers).

Furthermore, Taiwan Semi is also focusing on capacity planning for its next-generation 2-nanometer node, which is already witnessing more customer interest as compared to that seen for the 3-nanometer process node. The company plans to invest almost 70% to 80% of its over $30 billion capex in advanced process nodes in 2024. Taiwan Semi is also expanding manufacturing of advanced process nodes beyond Taiwan to reduce its geographic concentration risk. The company has planned three fabs in Arizona, which will also help strengthen its ties with key clients. The increased investment will translate into even higher revenue and profits for Taiwan Semi in the coming years.

Considering Taiwan Semi's technological superiority in advanced process technology and increasing demand for advanced process nodes in AI and HPC applications, the company is all set to ride a multiyear growth wave.