Shares of Palantir Technologies (PLTR 2.29%) have more than quadrupled year to date over unrelenting demand for the company's new artificial intelligence platform. However, the median price target on the stock implies 48% downside. In that context, Shopify (SHOP 3.45%) and Arm Holdings (ARM 4.28%) present more compelling investment options.

Palantir is currently worth $165 billion, but I think Shopify and Arm can top that figure before the end of 2025. Certain Wall Street analysts agree, as detailed below:

• Loop Capital analyst Anthony Chukumba recently raised his target price on Shopify to $140 per share, which implies 23% upside from its current share price of $114. That would give the company a market value of $180 billion.
• Morgan Stanley analyst Lee Simpson has a target price on Arm of $175 per share, which implies 28% upside from its current share price of $137. That would give the company a market value of $183 billion.

Here's what investors should know about Shopify and Arm.

1. Shopify

Shopify integrates physical and digital sales channels into a single dashboard that lets merchants manage their businesses across multiple storefronts. Shopify also provides a wide range of adjacent financial services and merchant solutions, including tools for business-to-business (B2B) commerce, also known as wholesale commerce.

Investors may not think of Shopify as an artificial intelligence (AI) company. But automation presents a big opportunity to better serve merchants and improve efficiency, and Shopify is leaning in. The company has introduced a suite of AI tools called Shopify Magic that helps merchants organize storefronts, generate marketing content, write product descriptions, and provide customer service.

Additionally, Shopify is using artificial intelligence internally to assist its engineering, sales, and finance teams. That should boost margins and lead to greater profitability over time. Indeed, the potential for AI-driven margin expansion is one reason Anthony Chukumba at Loop Capital recently raised his target price.

Shopify reported encouraging financial results in the third quarter that beat estimates. Revenue increased 26% to $2.1 billion on equally strong sales growth across subscription software and merchant services. Meanwhile, non-GAAP earnings increased 46% to $0.35 per diluted share. The company expects similar sales growth in the fourth quarter.

Additionally, management highlighted strong gross merchandise volume increases in three strategic growth areas: offline (27%), wholesale (145%), and international (30%). Shopify also said the number of international merchants (i.e. outside of North America) on its platform increased 36% in the third quarter.

Wall Street expects Shopify's earnings to grow at 44% annually during the next three years. That makes the current valuation of 107 times earnings seem tolerable. As a caveat, while I think the stock can return 23% before year's end 2025, putting Shopify ahead of Palantir's current market value, shares are not cheap. So, investors should start with a very small position.

2. Arm Holdings

Arm develops central processing unit (CPU) architectures and related products like solutions for software development and systems design. It licenses that intellectual property to companies that want to build their own chips. Those companies benefit by outsourcing some chip-related R&D costs, while retaining the ability to customize chip design. Rivals like Intel and AMD do not offer the same flexibility.

CPU architecture defines how the hardware interacts with software. Arm CPUs are known for their energy efficiency, which has made them the industry standard in battery-powered mobile devices. For instance, Arm has more than 99% market share in smartphones. But the company has made strides in improving performance with its latest architectures, which has led to share gains in the data center.

Indeed, Nvidia's Grace Blackwell chips pair GPUs with Arm CPUs to speed up data center workloads like artificial intelligence. And the three major public clouds -- Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud -- have deployed Arm CPUs in their data centers. CFO Jason Child said sales growth from cloud computing customers hit a record high in the June quarter.

More recently, Arm reported September-quarter results that beat guidance, but the numbers themselves weren't that impressive. Total sales increased 5% to $844 million because of strong growth in per-chip royalty revenue, offset by lower licensing revenue that management attributed to normal fluctuations in timing. Meanwhile, non-GAAP earnings declined 17% to $0.30 per diluted share.

However, management expects growth to pick up in the coming quarters, such that full-year revenue and adjusted earnings increase 22% in fiscal 2025, which ends in March. Beyond that, Wall Street anticipates earnings growth of 33% annually through fiscal 2027. In that context, the current valuation of 100 times adjusted earnings is still expensive, but investors will have to pay a premium to own shares right now because of excitement about the AI boom.

Importantly, while I think Arm shares can return 28% in the next year, such that it passes Palantir's current market value, investors uncomfortable with volatility should avoid the stock. And even those comfortable with volatility should start with a very small position.