Artificial intelligence (AI) is a fascinating technology whose potential hasn't been fully discovered. Incredible programs like ChatGPT have already passed the bar and U.S. medical licensing exam, but other, more practical uses of AI are already available for businesses to utilize.
Two companies that utilize AI at the core of their software are CrowdStrike (CRWD 2.30%) and Palantir (PLTR 2.44%). Each stock has a huge runway, and investors should consider these two stocks to fill out the AI investment niche in their portfolio. Read on to find out why.
1. CrowdStrike
CrowdStrike utilizes AI to improve its cybersecurity software continuously. By analyzing trillions of signals weekly, CrowdStrike harnesses AI's power in a machine learning model to determine what activity is normal, an anomaly, or a threat. When one customer is attacked, it uses that information to improve the protection of all CrowdStrike clients, preventing an attacker from exploiting the same weakness twice.
The solution is prevalent, with 21,146 clients as of Oct. 31, 2022, up 44% over last year's total. Among its customers are 40 U.S. state governments, 69 of the Fortune 500, and 15 of the top 20 U.S. banks. That's an impressive client list, but CrowdStrike's future growth depends on those customers expanding their usage.
CrowdStrike has over 20 modules that expand the base offering and empower security teams to both improve the platform and gain greater visibility into the threats a client faces. The more modules the average customer uses, the more revenue CrowdStrike brings in, and it has been quite successful in upselling its product to its customers.
| Number of Modules Utilized | Percent of Customer Base | YOY Increase |
|---|---|---|
| 5 or More | 60% | 55% |
| 6 or More | 36% | 66% |
| 7 or More | 21% | 81% |
Source: CrowdStrike.
New customers and existing client expansion helped increase CrowdStrike's annual recurring revenue by 54% to $2.34 billion in the third quarter of fiscal year 2023 (ended Oct. 31). It's also a free cash flow (FCF)-generating machine, converting 30% of Q3 revenue into FCF of $174 million.
For the growth CrowdStrike is generating, its current price tag of 43 times FCF is a bargain -- that's only a 35% premium to Microsoft despite growing at a much faster pace. CrowdStrike is just in the early innings of its product deployment and is one of the best ways to invest in AI.
2. Palantir
Palantir utilizes AI in its software to crunch data and provide actionable insights. At first, its technology was developed for government use and reportedly helped the U.S. government pinpoint the final hideout of Osama bin Laden. Now, Palantir is rolling out its software for civilian use and is on a mission to help streamline a company's operations.
As a testament to Palantir's usefulness, Tyson Foods realized about $200 million in cost savings across 20 different projects, and Swiss Re claimed Palantir's first $100 million or greater savings. As for new customers, Cloudflare recently signed a strategic partnership with Palantir to improve the costs associated with Cloudflare's cloud infrastructure offering.
With only 228 commercial customers as of Sept. 30, investors might wonder why so few companies are using it. The answer lies in the cost -- a one-month subscription on the Amazon Web Services (AWS) store is $1 million per month. Because of its price tag, Palantir limits which customers can feasibly use its product to only the largest companies. However, that's still a sizable client base.
It's also growing rapidly, with revenue up 22% year over year to $478 million. But U.S. commercial revenue (a key business focus) was up 53% in Q3. Unlike CrowdStrike, Palantir has a ways to go in its profitability department. FCF was $32.6 million for Q3 -- a 6.8% margin.
Actual profits are even further off, with Palantir losing $124 million -- a 26% profit loss margin. Much of this loss is due to a high stock-based compensation bill of $140 million, although this was drastically down from 2021's Q3 value of $185 million. If investors take a position in Palantir, they will need to watch this trend to ensure it continues moving in the right direction, as Palantir has a lot of work to do before breaking even.
With Palantir's current price-to-sales (P/S) ratio, it's pretty clear the market is skeptical about any profits.
PLTR PS Ratio data by YCharts.
At its current valuation, Palantir is worth taking a shot at, especially considering its powerful AI software. However, you'll have to be patient because it may take a while for profits to come to fruition.
