Many tech and artificial intelligence (AI) stocks are currently trading at significant valuations, which indicates the anticipation of substantial earnings growth in the forthcoming years. This is the primary reason behind the investors' bullish sentiment towards these companies. They are essentially purchasing future earnings and growth. Two notable examples that fit this description are the fintech SoFi Technologies (SOFI 0.39%) and the artificial intelligence company Palantir Technologies (PLTR -3.35%). Each of these companies has had an outstanding year, with SoFi's stock witnessing a remarkable increase of over 41% and Palantir's soaring by over 296%.
Unraveling the Future of Tech Stocks' Earnings Growth
Palantir: 48% Earnings Growth
Analysts anticipate that Palantir's diluted earnings per share will rise from $0.21 this year to $0.31 in 2025, signifying a nearly 48% upward trajectory. Nine brokers have provided their estimates, with a low estimate of $0.25 and a high estimate of $0.42. Palantir's software is widely utilized by companies and governments to analyze extensive amounts of data. The platform acts as a bridge between complex AI and machine-learning language models and human analysis.For instance, in counter-terrorism efforts, the government employs Palantir to analyze and visualize data from disparate sources, enabling the detection of patterns and the acquisition of actionable insights. Palantir has enhanced the visibility of its platform through its Artificial Intelligence Platform boot camps. This allows customers to test out the platform and utilize the technology to address real business problems.It is evident how Palantir's products can be highly beneficial for nearly every sector. However, what remains unclear is the degree of differentiation of Palantir and whether it truly constitutes a sustainable competitive advantage. Currently, this could be said about most AI businesses. While some believe Palantir is a leader, others are less inclined to agree with its lofty valuation.After the stock's remarkable performance, some analysts believe that maintaining this growth will become more challenging as the company will face tougher comparisons. Although Palantir's 48% earnings growth is not to be underestimated, it may not justify such a high valuation.SoFi: 115% Earnings Growth
The fintech company SoFi aims to fulfill customers' financial requirements by offering bank accounts, personal budgeting tools, an investment platform, and various loans such as mortgages, student loans, and personal loans. Additionally, SoFi has a tech division that sells products and services to support core banking activities for banks and other companies seeking to expand their financial services offerings.The stock has witnessed a nearly 37% increase this year and has a market capitalization of over $14.3 billion. A significant part of SoFi's business is growing its student and personal loan portfolios to generate more net interest income and selling loans to investors. Lower interest rates are expected to benefit this aspect of the company as they will gradually reduce deposit costs and attract more investors back into the market, thereby providing SoFi with greater capacity to originate and sell loans. The incoming administration of President-elect Donald Trump may also prove beneficial for SoFi's student loan business, which faced difficulties during President Joe Biden's administration due to a prolonged student loan moratorium and uncertainties surrounding Biden's attempts to implement student loan forgiveness. Lower interest rates can also help alleviate investor concerns regarding credit quality.Furthermore, SoFi's tech business may gain from banks finally obtaining clarity on regulatory capital rules. One component of SoFi's tech business involves selling cloud-based core-processing banking technology that assists banks in powering their daily banking operations. The process of pushing these sales through can be a lengthy one. It is likely that many bank boards have been preoccupied with managing their balance sheets during the high interest rate environment and preparing for higher regulatory capital rules. A more favorable environment for banks may prompt them to take action on some of their new initiatives, including these deals.Wall Street analysts anticipate that SoFi will generate $0.28 of diluted earnings per share, up from the projected $0.13 this year, suggesting a 115% increase next year. The low estimate is $0.22 and the high estimate is $0.35. The trajectory of interest rates will play a crucial role for SoFi, with more rate cuts being more advantageous.