One of the most important themes that helped drive the market last year was artificial intelligence (AI). Technology, which in the past was relegated to science fiction, has suddenly become mainstream. Companies, meanwhile, are racing to become leaders in AI, believing it to be a generational opportunity.
Let’s look at three stocks that benefit greatly from AI.
Known as one of the largest suppliers to the US government, Palantir Technologies(NASDAQ:PLTR) and its data collection and analytics solutions have been used for such critical tasks as counterterrorism and tracking COVID-19 cases. However, the company is now able to integrate AI into its solutions to begin helping its business customers meet their own critical needs.
While many big tech companies have focused on developing the best AI models, Palantir has instead decided to focus on the applications and workflow layers of AI software to improve logic and functionality. This helps AI perform actions better in real-world applications. Its AI platform is designed to form the operational layer of an organization, where digital assets, such as data sets and models, are then connected to their real-world counterparts, such as products or customer orders. customers.
The company’s solutions have seen huge demand from commercial customers, with U.S. commercial revenue up 54% last quarter to $179 million, while that the number of commercial customers in the United States increased by 77%. Meanwhile, the U.S. government, its largest customer, is also beginning to adopt AI solutions.
So far, much of Palantir’s early AI success has been based on proof-of-concept prototype work. It has done a great job acquiring commercial customers through its Artificial Intelligence Platform (AIP) boot camps, where it demonstrates to customers how its technology can be applied to potential use cases while providing integration and training. The big opportunity going forward is to move these customers from proof of concept to production. This should help accelerate the company’s overall revenue growth, which was 30% last quarter.
The only problem with Palantir is the valuation, as the stock currently trades at 42x forward. price-sales ratio report.
Image source: Getty Images.
Another company that has benefited greatly from AI is AppLovin(NASDAQ:APP). The company has a portfolio of apps, but its core business is an adtech solution that helps gaming apps attract and better monetize customers.
Since launching its AI-based Axon 2 solution in early 2023, the company’s revenue has soared as gaming applications have adopted its technology. Existing customers started spending more and this also attracted a lot of new customers. Axon 2 uses predictive machine learning to target ads to users who are most likely to download these apps.
Axon 2’s success is reflected in revenue from the AppLovin software platform, which jumped 66% to $835 million last quarter. What’s even more impressive is that this revenue growth comes on top of the 65% software platform revenue growth recorded a year ago in Q3 2023.
The solution proposed by the company appears to deprive customers of Unity softwarewhose comparative “growth solutions” segment saw a 5% drop in turnover in the last quarter. The success of Axon 2 also leads to a strong improvement in the company’s gross margin, which increased to 77.5% from 69.3% a year ago. This in turn leads to even better profitability growth.
AppLovin said it expects gaming customer revenue growth to be in the 20% to 30% range over the long term, but its biggest opportunity is to move its adtech platform beyond games. The company has tested Axon 2 with e-commerce companies with rapid success, and it expects this new vertical to become a significant contributor in 2025.
The stock is currently trading at a forward price-to-earnings (P/E) ratio of 39.5 based on analyst estimates for 2025, with a price-to-earnings-to-growth (PEG) ratio of 0.63. A PEG ratio below 1 is considered undervalued and growth stocks will often have multiples well above 1.
Semiconductor manufacturer Broadcom(NASDAQ:AVGO) has started to make waves in the AI chip market, where the company works with customers to design custom AI chips for things like AI training and inference. Alphabet was its first big customer in this area with its tensor processing units (TPUs), which it saw as a key differentiator that helps reduce inference processing times and reduce costs.
Broadcom’s custom chips are designed for very specific tasks and, as such, perform better in those tasks than graphics processing units (GPUs), which offer more flexibility. For example, Alphabet’s TPUs are optimized for tensor operations in Google Cloud’s TensorFlow framework. Tensor operations are a form of high-level mathematics used in AI deep learning.
The company has seen strong growth in its custom AI chips, which surpassed $12 billion in revenue in fiscal 2024. At the same time, the company has steadily added new customers.
Last quarter, the company said its three big custom AI chip customers, likely Alphabet, Metaplatformsand ByteDance – each planned to deploy 1 million AI chip clusters by 2027, which would equate to an addressable market of between $60 billion and $90 billion in fiscal 2027 alone. Meanwhile, it said two customers additional, probably OpenAI and Apple — were moving forward with the development of their chips, which could increase that number even further.
If the custom AI chip market continues to take off, Broadcom looks poised to be the biggest winner. The stock is currently trading at a forward P/E of 36.5 based on analyst estimates for this fiscal year (ending November 2025), which is not expensive if it can take advantage of the opportunity of its AI chips.
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Geoffrey Seiler holds positions at Alphabet. The Motley Fool holds positions and recommends Alphabet, AppLovin, Apple, Meta Platforms, Palantir Technologies and Unity Software. The Motley Fool recommends Broadcom. The Mad Motley has a disclosure policy.
