AI Bubble Fears Spark a Sell-Off: 1 Stock to Buy, and 1 to Avoid
AI enthusiasm pushed many stocks to stretched levels. Now that sentiment is wobbling, the gap between sensible bets and fragile stories is clear. If you want AI exposure without betting the farm on momentum, one stock stands out as a steadier option - and another looks priced for perfection.
- Buy: Microsoft - diversified, strong cash flows, and AI already boosting results.
- Avoid: Palantir - excellent business, but a valuation that leaves little room for error.
The buy: Microsoft
Microsoft sits near the center of AI demand through Azure, Copilot in Microsoft 365, and its partnership with OpenAI. The key is that AI isn't just a story here - it's showing up in the numbers.
In Q1 FY2026, revenue hit $77.7 billion, up 18% year over year. Microsoft Cloud grew 26% to $49.1 billion. Intelligent Cloud revenue climbed 28% to $30.9 billion, supported by 40% growth in Azure and other cloud services. You can verify ongoing updates via Microsoft's investor relations.
At roughly 34 times earnings, the stock carries a premium, but not a frothy one for a company growing revenue in the high teens with expanding earnings and a fortress balance sheet. If you want durable AI exposure that doesn't depend on perfect conditions, this fits.
The avoid: Palantir
Palantir has become a headline AI winner, with the stock up more than 100% this year before a recent pullback. The business is executing: Q3 revenue rose 63% year over year to about $1.2 billion, accelerating from 48% in the prior quarter. GAAP profit reached $476 million, about 40% of revenue. You can track updates on Palantir's investor site.
The issue isn't quality - it's the price. Shares around 165 times forward earnings bake in exceptional outcomes. With well-funded rivals and meaningful exposure to government budgets, any slowdown in contract wins or a cool-off in AI excitement could hit the stock far harder than the business.
Side-by-side snapshot
- Business mix: Microsoft is widely diversified (productivity, cloud, AI services). Palantir is more concentrated in analytics platforms and government-heavy contracts.
- AI traction: Microsoft shows broad AI monetization across Azure and software. Palantir's growth is strong but leans on large contracts and sentiment.
- Valuation risk: Microsoft at ~34x earnings is elevated but reasonable. Palantir at ~165x forward earnings prices in near-flawless execution.
What could change the call
- Microsoft upside: Continued 30%+ growth in Azure and accelerated Copilot adoption across enterprises.
- Microsoft risk: A notable deceleration in cloud growth or margin compression from heavy AI capex.
- Palantir upside: Sustained 50%+ growth with a rising commercial mix and multi-year, high-visibility deals.
- Palantir risk: Contract timing slippage, lower government spend, or increased competition pressuring pricing.
Practical playbook for investors
- Position sizing: Keep single-stock exposure modest. Favor larger sizing for diversified platforms like Microsoft; keep speculative names small.
- Entry strategy: Use staged buys or dollar-cost averaging during volatility to improve average price.
- What to track: Azure growth, Microsoft Cloud margins, Copilot adoption; for Palantir, commercial revenue mix, remaining performance obligations, and competitive wins.
- Risk control: If you hold Palantir, set alerts tied to contract announcements and growth rates. Be honest about why you own it - story or numbers.
Bottom line
AI-driven selling has reminded everyone that price matters. For steady exposure, Microsoft offers breadth, cash generation, and tangible AI monetization without bubble-level pricing. Palantir is a strong company trading at a fragile multiple - great when everything goes right, unforgiving when it doesn't.
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