Comparing Growth Stocks: Palantir Technologies vs. Netflix

When looking at growth stocks, Netflix is often seen as a more established player than Palantir Technologies. Despite this maturity, Netflix surprisingly holds its ground when compared to one of Wall Street's most sought-after AI stocks.

Palantir Technologies has made a significant impact on the market in recent years, standing out as one of Wall Street's top growth stocks. Since the beginning of 2023, its share price has skyrocketed by over 1,700%. While it's tempting to simply celebrate this remarkable performance, Palantir appears to have much more growth potential ahead. Their artificial intelligence (AI) software is continually helping governmental and corporate clients optimize their operations.

On the other hand, keeping the excitement alive for Netflix is becoming more of a challenge. Although the streaming service was a pioneer in its sector, that innovation happened years ago, and the landscape is now saturated with various competitors.

Analyzing both companies reveals key lessons about the risks of excessive market hype. A deeper investigation is necessary to assess which stock might be the better value for future investors, and the results might be surprising.

Market Leadership of Each Company

Both companies tell compelling stories of success.

Palantir went public in 2020 after establishing itself primarily through government contracts. The company excels in using artificial intelligence, machine learning, and data analytics for diverse applications, like tracking terrorists, improving supply chains, and detecting financial fraud. Since releasing the Palantir Artificial Intelligence Platform (AIP), their revenue growth has accelerated significantly. As a leader in AI software, Palantir has been steadily acquiring enterprise clients, increasing its customer base by 43% year over year to 711 clients. However, this is just a fraction of the 377,000 potential enterprises worldwide that could be leveraging AI technology in the coming years.

In contrast, Netflix stands as a more matured business. With over 301 million paid subscribers, it has solidified its position as a global leader. The appeal of streaming services lies in consumer habits, where it's common for individuals to subscribe to multiple platforms. Even with rising competition, Netflix remains popular, thanks to its extensive content library and a consistent stream of new releases. It reported a 15.9% growth in paid subscribers year over year in its latest quarter. Considering there are over 8 billion people on the planet, Netflix still possesses considerable room to expand its subscriber base. Thus, both companies showcase competitive strengths within their markets.

Financial Analysis: Netflix vs. Palantir

Diving into the financial metrics of each business, Netflix begins to stand out.

While Palantir demonstrates faster revenue growth — expected for a younger firm — this is offset by Netflix's superior profit margins. Historically, as a company matures, higher revenues typically lead to better margins. However, Palantir's profit margin appears to have plateaued, while Netflix's continues to improve as its subscriber count increases, allowing for more cost distribution per user.

One point of concern for Palantir is its valuation. Currently, Palantir’s price-to-earnings (P/E) ratio exceeds 620, along with a forecasted long-term earnings growth rate of about 26%. This results in a sky-high price/earnings-to-growth (PEG) ratio of more than 23. For reference, stocks with PEG ratios below 2.5 are generally seen as more attractive. Conversely, Netflix's stock trades at 53 times earnings, with a projected 24% growth rate, leading to a PEG ratio of 2.2. Although not exceedingly cheap, this falls within a more appealing range for investors.

In summary, Netflix emerges as a more profitable business that is also better priced compared to Palantir.

Challenges for Palantir Technologies

One of the more troubling aspects of investing in Palantir is its significant use of stock-based compensation. While this method helps generate necessary cash flow, it detracts from net income, explaining why Netflix enjoys higher profit margins. Evidence suggests that Palantir's stock-based compensation regularly exceeds 20% of its quarterly revenue, whereas Netflix's portion remains minimal and decreasing.

This heavy reliance on stock-based compensation could potentially dilute investors over time, affecting the value of each stock share. While there are numerous positive indicators for Palantir's future growth, the considerable headwinds present significant challenges for investors right now. Therefore, Netflix, a strong company in its own right, appears to be the superior choice for growth investors today.

No position is held by the author in either of the stocks mentioned. The author acknowledges that both Netflix and Palantir Technologies are recommended stocks.

Palantir, Netflix, Growth