AI Hardware Rallied While Adobe and Palantir Sank. Which Side Is Right?

On September 4, the market demonstrated a clear divergence as AI-related hardware stocks soared, while Adobe and Palantir experienced significant declines. Memory, connectivity, chip-equipment, and power stocks all rallied, contrasting with Adobe's 6.7% drop and Palantir's 4.5% decrease. Adobe's decline was attributed to the appointment of Anil Chakravarthy as CEO on December 1, and Palantir faced questions about its valuation, contract concentration, and termination clauses.

Adobe's growth story hinges on its AI-first revenue, which has more than tripled to above $500 million in annualized recurring revenue. Their AI integration across creative, document, and marketing workflows is expected to bolster their market position. However, critics contend that low-cost generative tools could erode pricing power, and leadership transitions could complicate execution. Currently, 81 hedge funds hold Adobe shares, a decrease from 86 in March.

On the other hand, Palantir's success is evident in its Q2 revenue growth of 93% to $1.94 billion, with U.S. commercial revenue increasing 149% and an adjusted operating margin of 62%. Palantir's software is designed to turn model output into governable operational decisions. However, concerns remain over valuation, contract concentration, and termination clauses, as well as the risk of normalization of growth rates as competitors improve. Currently, 86 hedge funds hold Palantir shares, a decline from 96 in Q1.

The hardware sector's rally is backed by tangible near-term AI capacity demand, while software vendors must demonstrate that new tools create paid usage instead of reducing seat counts. Adobe's upcoming earnings report on September 10 will provide insight, while Palantir's contract conversions and remaining deal value growth will serve as a longer-term test. While both companies have potential, investors are advised to consider other AI stocks with greater upside potential and less downside risk.