1 AI Software Stock That Can Outperform Palantir Over the Next Year

Key Points
Palantir has produced phenomenal financial results over the last few years.
Its stock still trades for an astronomical valuation, and expectations are extremely high.
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Few software stocks have matched Palantir's (NASDAQ: PLTR) performance over the last few years. The company has seen its share price soar as it incorporated large language models into its software, advanced its data ontology framework, and won bigger government contracts.
While Palantir's stock has been caught up in the broader sell-off among SaaS stocks, the company looks fairly resilient. Even so, investors should always be on the lookout for even better opportunities. And one software stock could come roaring back much faster than Palantir in 2026.
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Palantir is a clear AI winner in software
The SaaSpocalypse impacting the broader software sector was triggered by fears that generative AI tools could eventually provide many of the features of enterprise software packages, making subscriptions to them unnecessary. But the things that Palantir's software does are practically impossible to replicate using other platforms, and large language models have proven immensely valuable for getting more out of it.
Palantir's platforms rely on proprietary machine learning models that aggregate disparate datasets to optimize decision-making for governments and corporations. It has been building and refining those algorithms for over 20 years, giving it a massive competitive advantage. The addition of its Artificial Intelligence Platform, which allows users to plug in a large language model and interact with its software using natural language and agentic AI, has lowered the learning curve and expanded the use cases for its core data and decision-making platforms.
Palantir's accelerating revenue growth appears to back up the premise that advances in AI are good for its business, not a threat. The company's revenue grew 70% year over year in the fourth quarter, up from 63% growth in the third quarter and 48% in the second quarter. It's also showing strong operating leverage as it scales, reaching an adjusted operating margin of 57% in the fourth quarter. Few companies of Palantir's current scale have ever grown as quickly as it is growing today.
And that growth appears to be poised to continue. The Department of Defense has decided to make Palantir's Maven system an official program of record by the end of the year, according to recent news reports. That will expand and secure Palantir's strong U.S. government business, which could get another boost from additional defense spending initiated by the Trump administration. Palantir is also reportedly involved in the early development of Trump's proposed Golden Dome anti-missile project, which could be worth billions in revenue.
Palantir's strong financial performance has led to extremely high investor expectations and an even higher valuation. Its forward P/E ratio of 113 is extremely expensive. For Palantir to climb significantly higher, it would have to outperform analysts' already lofty expectations, which anticipate it growing earnings per share from $0.75 in 2025 to $2.65 in 2028 -- a 52% compound annual growth rate.
Another AI stock looks well-positioned to outperform analysts' expectations, and it currently trades at a much more attractive valuation.
The AI stock that could outperform Palantir
Software companies that offer just one or two solutions may be at greater risk of disruption from AI than those that offer a wide variety of solutions that are all complementary to one another. What's more, those that leverage large language models and agentic AI across a wide variety of applications may see even stronger results.
That's the core reason why I think ServiceNow (NYSE: NOW) is poised to bounce back strong from the SaaS stock sell-off and outperform Palantir over the next year. ServiceNow offers a growing suite of software solutions for IT, HR, customer service, and other departments that need service and operations management. The company attracts new customers with its best-in-class solutions and then habitually expands its relationships with those customers by cross-selling them on additional packages.
With a 98% customer retention rate, ServiceNow's net revenue retention far exceeds 100%. Indeed, management points out that it has seen over 50% annual growth in contract value from every cohort in its history, including customers that just signed up a year ago.
Artificial intelligence could supercharge that growth. Management was quick to integrate generative AI across its suite, and it's already seeing good traction. Its NowAssist generative AI offering generated $600 billion in annual contract value last year, and management expects it to surpass $1 billion this year. Meanwhile, its AI Control Tower deal volume tripled sequentially in the fourth quarter.
The AI Control Tower strategy puts ServiceNow at the center of agentic AI for enterprises. It helps businesses manage and deploy AI agents, including those from third parties, across ServiceNow's software suite. The idea is to put itself at the center of its customers' AI strategies, and it's already seeing very strong momentum.
Management's 2026 guidance was a bit disappointing. It only expects 20% subscription revenue growth, including revenue from recent acquisitions. That implies a slowdown in organic revenue growth. But management is guiding for its already solid operating margin to expand by 1 percentage point to 32%, and it ended the year with strong remaining performance obligation growth. As such, management's outlook may have been conservative.
Shares of ServiceNow trade at just 25 times earnings expectations. What's more, those expectations are well within reach for ServiceNow. Analysts expect it to grow EPS from $3.48 in 2025 to $6.19 in 2028, a 21% compound annual growth rate. At its current price, it looks like a bargain, and strong execution of its AI strategy could drive stronger-than-expected earnings and multiple expansion, leading to share price outperformance.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and ServiceNow. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.