Palantir (NYSE: PLTR) and Nvidia (NASDAQ: NVDA) represent two different ways to invest in the growing AI market. Palantir is a data mining and analytics company which mainly serves U.S. government agencies and large enterprise customers. It aggregates data from disparate sources to help those clients make smarter data-driven decisions.

Nvidia is the world's top producer of discrete GPUs. Its chips were once mainly used in PC gaming, but it expanded into the data center market with higher-end GPUs for processing machine learning and AI tasks. It now generates most of its revenue from the data center market, and most of the world's top AI companies -- including Microsoft, OpenAI, and Alphabet's Google -- rely on Nvidia's chips to process their latest AI applications.

Over the past 12 months, Palantir's stock rose nearly 190% as the growth of its commercial business accelerated and its margins expanded. Nvidia's stock rallied more than 220% as the growth of the generative AI market lit a raging fire under its data center business. But should you buy either of these hot AI stocks right now?

Investors should reset their expectations for Palantir

Palantir went public via a direct listing in September 2020. Its stock opened at $10 a share, and eventually quadrupled to a record high of $39 on Jan. 27, 2021. At its peak, it traded at 300 times the adjusted EPS it would generate in 2021.

Palantir's investors were initially impressed by its rosy expectations for at least 30% revenue growth each year through 2025. Its revenue rose 41% in 2021, but grew just 24% in 2022 and 17% in 2023. That slowdown, which the company attributed to choppy government spending and economic headwinds for its commercial business, sank the stock to a record low of $6 in December 2022.

Palantir's stock has nearly quadrupled since then, but it remains more than 40% below its all-time high. The bulls returned as revenue growth stabilized, operating margins expanded, and it turned profitable on a generally accepted accounting principles (GAAP) basis. The company also drummed up some excitement with its rollout of new AI tools over the past year.

For 2024, Palantir expects its revenue to rise 18% to 20%, its adjusted operating margin to expand six percentage points to midpoint of 34%, and to remain firmly profitable on a GAAP basis. Those improvements should be driven by the accelerating growth of its commercial business and the stabilization of its government contracts.

Analysts expect Palantir's adjusted earnings to grow 32% for the full year. Its stock might still seem a bit pricey right now at 68 times forward earnings -- but it looks more reasonably valued than during the meme stock rally in 2021.

But they should maintain their high expectations for Nvidia

Nvidia's stock has only retreated about 8% since it set a new record high of $950.02 on March 25. The bulls continued to buy the chipmaker's stock as the most straightforward play on the AI market -- since the world's top generative AI platforms simply can't process their natural language queries without its GPUs.

In fiscal 2023, which ended last January, Nvidia's revenue stayed flat year over year as its adjusted EPS declined 25%. At the time, the PC market's post-pandemic market slowdown was reducing its sales of gaming GPUs, while the "crypto winter" was driving disenchanted miners to flood the market with secondhand GPUs.

But in fiscal 2024, Nvidia's revenue and adjusted EPS surged 126% and 288%, respectively. Nearly all of that growth was driven by the buying frenzy in data center GPUs for handling AI tasks. For fiscal 2025, analysts expect the company's revenue and adjusted EPS to rise 83% and 91%, respectively, as the market's demand for its new data center chips continues to outstrip available supply. The stabilization of the PC market should also complement that growth as its gaming business recovers.

Nvidia's stock might not seem cheap at 36 times forward earnings, but it's still reasonably valued relative to the growth potential of the generative AI market -- which Fortune Business Insights believes will expand at a compound annual growth rate (CAGR) of 47.5% from 2023 to 2030. Nvidia's first mover's advantage in that market also gives it tremendous pricing power: gross margin rose from 56.9% in fiscal 2023 to 72.7% in fiscal 2024, and could easily expand again in fiscal 2025.

The obvious winner: Nvidia

Palantir's growth is stabilizing, but it faces plenty of competitors in the data analytics market and its stock isn't a screaming bargain yet. Meanwhile, Nvidia's stock is cheaper, it continues to sell the best picks and shovels for the AI gold rush, and it probably won't be overtaken by any of its potential challengers in the foreseeable future. Those core strengths easily make Nvidia the better long-term play on the AI market than Palantir.

Should you invest $1,000 in Palantir Technologies right now?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Better AI Stock: Palantir vs. Nvidia was originally published by The Motley Fool