Dell vs. Palantir: Which New S&P 500 Stock is a Better Buy?

Artificial intelligence (AI) has been a transformative force in the financial markets, uplifting many stocks over the past year. Palantir Technologies Inc. (PLTR) and Dell Technologies Inc. (DELL) are two beneficiaries of this game-changing technology. While Palantir reaped significant rewards from the launch of its Artificial Intelligence Platform (AIP) last year, Dell is also aggressively tapping into AI's vast potential to drive its growth. 

This week, Palantir and Dell shares soared after S&P Global(SPGI) announced that both tech giants will join the benchmark S&P 500 Index ($SPX) ahead of the opening bell on Monday, Sept. 23. Palantir is poised to replace American Airlines (AAL) in the index, while Dell will take over Etsy’s (ETSY) spot. 

Gaining entry to high-profile indices like the SPX is a significant milestone for companies. This move not only elevates a company’s credibility but also amplifies its visibility, potentially boosting its appeal among investors - plus, it draws new buying from various SPX tracking funds and indices. 

So, as Palantir and Dell prepare to make their debut on the S&P 500 Index later this month, investors might be wondering: which tech giant offers the better investment opportunity? Let’s take a closer look to find out. 

The Case for Palantir Stock

Since its founding in 2003, Colorado-based Palantir Technologies Inc. (PLTR) has emerged as a key player in creating powerful software platforms for intelligence analysis and operational planning. Trusted by defense, law enforcement, and commercial sectors alike, Palantir's cutting-edge technology delivers data-driven insights crucial for counterterrorism efforts and high-stakes strategic decisions.

Valued at $77.7 billion by market cap, Palantir has ridden the AI wave to significant success. Shares of this data-mining and analytics company are up almost 124% over the past year, easily dwarfing the broader SPX’s 25.4% return during this period. The stock has also staged an impressive performance so far this year, with PLTR shares up 103.3 in 2024%, crushing the SPX’s 17.3% gain. 

Following the company’s Q2 earnings results, which blew past Wall Street’s forecasts, shares of Palantir rose more than 10% on Aug. 6. The company’s revenue of $678.1 million shot up 27.2% year over year, while its adjusted EPS of $0.09 soared a remarkable 80% annually, topping consensus projections by 10.6%. 

Palantir also demonstrated strong momentum in its U.S. commercial business, with revenue skyrocketing 55% year over year to $159 million and an 83% annual surge in customer count, reaching 295. On the government side, revenue climbed 23% year over year to $371 million. Plus, during the quarter, the company’s adjusted free cash flow swelled to $149 million, reflecting a margin of 22%.

In a letter addressed to shareholders, CEO Alex Karp said the strong Q2 results reflect the "unbridled demand for and understanding of the capabilities of our software." 

Encouraged by the robust demand for Palantir’s Artificial Intelligence Platform (AIP), management raised its fiscal 2024 guidance, projecting revenue to range between $2.742 billion and $2.750 billion, while U.S. commercial revenue is anticipated to surpass $672 million, reflecting a minimum growth rate of 47%. 

The company also raised its adjusted income from operations guidance range to between $966 million and $974 million, while maintaining its outlook for adjusted free cash flow of $800 million to $1 billion. Analysts tracking Palantir forecast the company’s profit to hit $0.19 per share in fiscal 2024, up 137.5% year over year, and climb another 36.8% to $0.26 per share in fiscal 2025. 

Wall Street remains cautious on PLTR stock, with many analysts citing its rich valuation as a point of concern. Of the 16 analysts covering the stock, two advise a “Strong Buy,” one suggests a “Moderate Buy,” five recommend “Hold,” one backs a “Moderate Sell,” and the six analysts advocate a “Strong Sell,” for a “Hold” consensus.

Palantir is trading at a premium to its average analyst price target of $25.69, while the newly set Street-high target of $50 suggests a potential upside of 43% from current price levels. 

The Case for Dell Stock

Texas-based Dell Technologies Inc. (DELL) has become a global tech powerhouse since its founding in 1984. Through its Infrastructure Solutions Group (ISG) and Client Solutions Group (CSG) segments, Dell develops, manufactures, markets, and supports a wide range of integrated solutions worldwide. 

The ISG segment focuses on AI-optimized servers, storage solutions, and networking products, while the CSG segment delivers desktops, laptops, workstations, and support services. 

With a market cap of around $79.5 billion, this tech giant, much like Palantir, has outperformed the broader market, posting impressive gains of 58.5% over the past year and 46.6% on a YTD basis.

Dell is balancing its growth ambitions with a strong commitment to shareholders. During Q2, the company returned approximately $1 billion to its shareholders through a combination of share repurchases and dividends. 

On Aug. 2, the company paid its shareholders a quarterly dividend of $0.445 per share. Its annualized dividend of $1.78 per share translates to an attractive 1.59% dividend yield. With a conservative payout ratio of 25.03%, Dell not only ensures its dividends are well-covered by earnings, but also leaves ample room for future growth. 

Dell lifted the curtains on its stronger-than-expected fiscal 2025 Q2 earnings results after the close on Aug. 29, triggering a 4.3% surge in its shares in the next trading session. Revenue climbed 9% year over year to $25 billion, topping Wall Street’s estimate of $24.1 billion, while adjusted EPS of $1.89 rose 9% annually, sailing past estimates by a solid 10.2% margin. 

Despite a slight drop in revenue from its CSG segment, Dell’s ISG segment reported record revenue of $11.6 billion, marking an impressive 38% year-over-year jump, driven by a stellar 80% increase in servers and networking revenue to $7.7 billion. Chief Operating Officer (COO) Jeff Clarke noted a significant acceleration in AI momentum during Q2, with a growing number of enterprise customers investing in AI solutions each quarter. 

The COO highlighted that the company’s "AI-optimized server demand was $3.2 billion, up 23% sequentially, and $5.8 billion year to date. Backlog was $3.8 billion, and our pipeline has grown to several multiples of our backlog." 

Looking ahead to fiscal 2025, management anticipates revenue to range between $95.5 billion and $98.5 billion, with the midpoint of $97 billion representing 10% growth. 

The ISG segment is expected to drive a substantial 30% revenue increase, fueled by AI advancements and robust server sales, while CSG revenue is projected to remain stable or grow modestly. Overall, ISG and CSG combined are set to grow 13% at the midpoint. Adjusted EPS for the entire year is forecast to come in at $7.80, plus or minus $0.25, reflecting a 9% increase at the midpoint.

Analysts tracking Dell project the company’s profit to jump 12.4% year over year to $6.90 per share in fiscal 2025 and grow another 27.7% annually to $8.81 per share in fiscal 2026. 

Overall, Wall Street is still highly bullish on DELL, with a consensus “Strong Buy” rating. Out of the 16 analysts offering recommendations, 12 advise a “Strong Buy,” two suggest a “Moderate Buy,” and the remaining two analysts maintain a “Hold.” 

The mean price target for DELL is $148.69, indicating expected upside potential of 32.5% from current levels. The Street-high target price of $186 implies that the stock could rally as much as 65.8% from here.

PLTR vs. DELL: Which Stock is the Better Buy?

Both Palantir and Dell present strong investment cases. Palantir offers high growth potential in the AI sector, though with higher volatility, while Dell provides a balanced approach with substantial growth prospects and attractive shareholder returns. Both stocks surged following their latest earnings reports, which exceeded expectations. 

However, the premium investors are paying for Palantir’s earnings appears to be significantly higher than that of Dell. Dell trades at 15.35 times forward earnings and 0.86 times sales, much lower than Palantir, which trades at a lofty 160.84 times forward earnings and 34.99 times sales. 

Plus, with analysts forecasting more than 30% upside potential for DELL over the next 12 months, while Palantir is already trading well above its average analyst price target, PLTR looks potentially overvalued. 

Considering all these factors, as both companies prepare to join the S&P 500, Dell appears to be the superior choice. While Palantir's massive growth so far is undeniably enticing, its steep valuation may be a major red flag for some investors. On the other hand, Dell offers a compelling alternative with a more attractive valuation and significant upside potential, making it a strong candidate for those seeking value along with growth.

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On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.