If you're confused about what artificial intelligence does or how powerful it is, just read this:

Artificial intelligence, or AI, refers to the simulation of human intelligence in machines that are programmed to think and act like humans. These intelligent machines are designed to learn and adapt to new situations and can be trained to perform a wide range of tasks, from simple to complex. AI has the potential to revolutionize many industries, including healthcare, finance, and education, by automating processes and making them more efficient and effective.

While that may sound a little dry, that paragraph was actually written by ChatGPT, an artificial intelligence (AI)-powered program. Feeding it prompts and watching ChatGPT do its job is fascinating, but it's only the surface of what AI can do.

Among the companies utilizing AI that make great investments are Palantir (PLTR -0.23%) and CrowdStrike (CRWD -0.68%). Let's examine how these companies utilize AI and why they might make great investments.

AI makes these platforms special

Palantir's data processing platform utilizes AI to help its users pinpoint potential chokepoints in a supply chain or discover inefficiencies in a business. However, it was first developed for government use and helped multiple agencies connect the dots to terrorist organizations or catch tax evasion. More recently, it helped track down more than 15,000 people to be evacuated from Afghanistan when the U.S. military pulled out in 2021. 

The IDC (International Data Corporation) ranked Palantir first in market share and revenue for AI platforms, showcasing Palantir's market leadership. While the company has many accolades and a great product, it comes at a steep price: $1 million per month for a Foundry subscription unit on the AWS marketplace. With this cost, it reserves Palantir's use for only the most prominent companies, which still generate a large amount of business.

CrowdStrike utilizes AI differently: Cybersecurity. The endpoint and cloud workload protection software generates trillions of data points weekly that are fed into CrowdStrike's AI. Then, it utilizes this information to improve the overall program, so every other client's protection is improved when one customer is attacked. This solution has proven effective and popular, as CrowdStrike has grown from 1,242 customers on Jan. 31, 2018, to 21,146 as of Oct. 31.

G2 also named CrowdStrike a leader in 16 different categories, showing that CrowdStrike doesn't sacrifice quality across its expansive product suite.

Both companies are utilizing AI to power their software, and both have a similar story with their financials.

A similar financial story for both companies

Palantir and CrowdStrike are quickly growing their revenue, but they are doing it at the cost of profitability.

Company Q3 Revenue Growth YOY Profit Margin
Palantir 22% (26%)
CrowdStrike 53% (9%)

Source: Palantir and CrowdStrike. YOY: Year-over-Year. Note: Palantir's Q3 ended Sept. 30, and CrowdStrike's Q3 ended Oct. 31.

Unfortunately, Palantir is growing much slower than CrowdStrike, so it will have a more difficult time closing its profitability gap. Still, both companies are profitable from a free cash flow basis, with Palantir generating $36.6 million in the third quarter (an 8% margin) and CrowdStrike generating an impressive $174 million (a 30% margin). So how do two unprofitable companies produce so much cash? They pay their employees with stock.

In Q3, Palantir and CrowdStrike each shelled out $140 million in stock to their employees -- a non-cash expense. While CrowdStrike is still profitable from a free cash flow basis, when this is subtracted, Palantir isn't. This is a significant cost to shareholders, as their holdings are diluted as the companies flood the market with new shares. While this isn't uncommon for younger companies to do, both are beginning to mature, so this expense should stabilize or, ideally, drop.

After CrowdStrike's recent sell-off, both companies now trade in a fairly normal valuation range for software companies.

CRWD PS Ratio Chart.

CRWD PS Ratio data by YCharts.

Because valuation doesn't pose as much risk, it now hinges on both companies becoming sustainably profitable. I think CrowdStrike will have a much easier time achieving this goal, but it will take Palantir a lot longer. So while I think both companies will be fine over the long term, CrowdStrike is a better buy right now, even if customers are becoming harder to acquire in today's economic environment.