Palantir Technologies has arguably been one of Wall Street's top growth stocks in the past couple of years. Since January 2023, its share price has climbed by more than 1,700%. It would be easy to view the company's past returns as a scoreboard, see Palantir's eye-popping performance, and stop there. And frankly, the company likely has a long runway for growth ahead of it as its artificial intelligence (AI) software helps its government and business clients transform their operations.

That recent run of explosive investment returns and Palantir's AI positioning are exciting. By contrast, it's getting harder for Netflix (NFLX -1.80%) to excite anyone. Sure, the company pioneered streaming video -- but that was years ago.

Yet both can illustrate the problems that result when a stock gets too much hype and attention. I dove into both companies to determine which would be the superior growth stock to hold moving forward. It wasn't as close a contest as I'd hoped, but the winner might surprise you.

Leadership in their respective markets

Both companies have impressive stories to tell.

Palantir went public in 2020 after years of working primarily for the U.S. government. The company's specialized software uses artificial intelligence, machine learning, and data analytics to perform various tasks, from tracking terrorists to optimizing supply chains to uncovering financial fraud. Its revenue growth has continuously accelerated since it launched the Palantir Artificial Intelligence Platform (AIP). It's a leader in AI software and is scooping up enterprise clients. Its customer count grew by 43% year over year in Q4 to 711, but that's just a tiny fraction of the 377,000 enterprises worldwide that may seek to bring AI technology into their businesses over the coming decade and beyond.

Netflix is a more mature business. The company pioneered streaming and has become a global juggernaut with more than 301 million paid subscribers. The great thing about streaming services is that people often use more than one. So even though the streaming market has become increasingly crowded over the past five years, Netflix has continued to thrive because it's vast catalog and steady supply of new offerings make it a no-brainer pick for so many consumers. Its paid subscriber count grew 15.9% year over year in Q4. There are over 8 billion people worldwide, so it still has plenty of room to grow its subscriber numbers. In short, both companies have competitive advantages.

Netflix is more fundamentally sound and offers superior value

As you dive into the financial qualities of each business, Netflix begins to separate itself.

Palantir is growing its revenues faster, which makes sense since it is younger. You could argue that the same logic explains why Netflix has higher profit margins (net income as a percentage of revenue). Ideally, Palantir's margins will improve as the company matures.

PLTR Operating Revenue (Quarterly YoY Growth) data by YCharts.

There are a couple of issues for Palantir. First, its profit margin has somewhat plateaued while Netflix's continues to increase. As its subscriber base grows, Netflix can spread its costs across more users. Investors will want Palantir to demonstrate that it can expand its profit margins further.

Second, Netflix's valuation is far more attractive. Palantir trades at a price-to-earnings (P/E) ratio of over 620, with an estimated long-term earnings growth rate of almost 26%. That gives it a lofty price/earnings-to-growth (PEG) ratio of more than 23. (I'll buy high-quality stocks with PEG ratios up to 2.5, for reference.) The market isn't just pricing future growth into Palantir's stock -- it's something beyond that. Netflix stock trades 53 times earnings, with an estimated 24% long-term earnings growth rate. The resulting PEG ratio (2.2) isn't cheap, but it is under my threshold, so I view it as a reasonable buy.

In other words, the more profitable business is also the better-priced stock by a wide margin.

The most troubling knock on Palantir

Arguably, the most concerning issue I've found about Palantir as an investment is the massive amount of stock-based compensation it distributes. This helps the company generate more cash flow, but subtracts from its net income. That's why Netflix had higher net profit margins. The chart below illustrates the difference. Palantir's stock-based compensation has yet to fall below 20% of its quarterly revenue, while Netflix's stock-based compensation amounts to a tiny (and shrinking) portion of its revenue.

NFLX Stock Based Compensation (% of Quarterly Revenues) data by YCharts.

So even if you expect Palantir to grow far faster than analysts estimate, the share price still faces a sizable headwind: Continuing heavy use of stock-based compensation will dilute investors over time and reduce the relative value of every share. There's a lot to like about Palantir, especially over the long term. But it's hard to justify making a meaningful investment in the stock right now. That leaves Netflix -- a fantastic company in its own right -- as a far better growth stock to buy.