The most popular stock in the field of artificial intelligence (AI) software is undoubtedly Palantir (PLTR 2.98%). The stock is up 160% this year and eclipsing the performance of the software company they most want to become when they grow up: Adobe (ADBE 0.18%).

Adobe’s stock is down 15% this year, but it also belongs in the AI ​​debate as it actively pursues the AI ​​image generation market as well as the AI ​​video market. However, despite Palantir’s fantastic year and Adobe’s bad year, Wall Street thinks investors would be wise to sell Palantir and buy Adobe.

For what? Well, the answer focuses on evaluation.

Both companies have a track record of investing in AI

Palantir’s AI platform is designed to provide anyone with decision-making power with the most up-to-date information possible. This involves processing multiple data streams simultaneously and then harnessing the power of AI to make recommendations. This software was originally intended for government use, but it has also made its way into the commercial sector.

More recently, Palantir’s new product, Artificial Intelligence Platform (AIP), has gained momentum. The AIP allows companies to integrate generative AI into their business systemswhich transforms AI from a tool that someone could use on the side to one that is integrated into workflows. This is a crucial step because it controls what information is seen by a large language model and prevents sensitive information from entering another company’s database.

Adobe is not as technologically advanced as Palantir. Its product suite is the industry standard for graphic design, but Adobe isn’t asleep at the wheel. It added Firefly to its product line, allowing creators to adjust images or create new ones with text input. However, many generative AI models already have this capability, so Firefly doesn’t stand out.

Few models can generate AI video, but Adobe is about to launch Firefly Video on a large scale. With Adobe at the forefront of this fundamental change in the way people work, it’s not likely to be replaced anytime soon. However, the title is no longer respected as much as it once was.

Both Palantir and Adobe have legitimate investment theses and are strong AI companies. However, Wall Street is much more bullish on Adobe than Palantir, and I agree.

Palantir is priced way too high for its growth

Wall Street currently has an average price target of $27.67 for Palantir stock, indicating a downside of about 35%. Adobe’s one-year average target is $621.15, indicating an upside of about 25% (both consensus targets come from TipRanks).

Why this significant gap? We need to take care of the valuation.

Even though Palantir is growing faster than Adobe, the price of that growth is too high for many investors.

PLTR operating revenues (quarterly growth over one year) data by Y Charts

Palantir is currently trading for a incredible 41.1 times sales. For comparison, Adobe trades 41.6 times his winnings. This is a huge gap because investors care about profits once a company reaches full maturity.

To illustrate Palantir’s price, let’s calculate the level of growth it would need to reach Adobe’s valuation.

In the second quarter, Palantir grew its revenue at a pace of 27%, and management expects third-quarter revenue growth of 25%. But as a guide, let’s say it can grow between these two projections (26%) for five years. That’s probably longer sustained growth than Palantir can sustain (Wall Street thinks its revenue will grow at a 21% pace in 2025), but it’s what’s needed to achieve the outcome the stock is for. evaluated.

Additionally, let’s say that Palantir can improve its profit margin from its current level of 20% to Adobe’s level of 30%. This is a much more reasonable projection, as Palantir has steadily improved its margins over the past few quarters.

If it did both things, Palantir stock would generate $2.36 billion in profits in five years, giving it a trailing earnings valuation of 40.7 times.

This is unchanged in today’s stock price. So if you think Palantir will be a better stock to own over the next five years, Adobe’s price will have to fall.

I think it’s a terrible bet, because Adobe has shown a knack for consistently growing in the teens every year.

Owning Palantir instead of Adobe doesn’t make much sensebecause the expectations linked to the stock are outrageous. While Palantir is a flashy AI stock, you’re better off owning the mainstay that continues its steady, market-beating trajectory year after year.