The public advent of ChatGPT has brought a surge of new attention to the field of artificial intelligence (AI). Based on that platform's sudden notoriety, many investors may have become more interested in owning shares of Microsoft due to its relationship with OpenAI, the research laboratory that developed ChatGPT.
Nonetheless, the breadth of AI stretches well beyond ChatGPT, and given that Microsoft already boasts a market capitalization of approximately $2 trillion, the tech giant's opportunities for parabolic growth are unlikely. So investors seeking steep share price gains from the rise of AI may want to look at smaller companies.
Two that they might find appealing right now are CrowdStrike Holdings (CRWD 0.14%) and Palantir Technologies (PLTR -0.84%).
CrowdStrike
The rise of the cloud changed the face of IT security, and many companies emerged to address the issues that arose. However, CrowdStrike has stood out for its tools to protect endpoints, workloads, identities, and data. Of all the vulnerabilities of a cloud network, these parts are highly susceptible to attacks.
The company addresses these challenges in a unique way. It applies AI to crowdsourced data to identify and guard networks against threats. Additionally, it can manage all the cybersecurity needs of its clients, meaning companies do not need additional online security software packages.
According to consulting firm McKinsey, cybersecurity could eventually become a $2 trillion industry, so even though it faces significant competition from both large and small companies, there's plenty of space for CrowdStrike to grow.
It is working fast to serve more of the market. CrowdStrike reported revenue of $1.6 billion in fiscal 2023's first nine months (ended Oct. 31). That was a 57% increase compared with the same period in fiscal 2022. Admittedly, CrowdStrike reported net losses due to its high levels of stock-based compensation. Still, the company managed to generate $467 million in free cash flow in the first three quarters of fiscal 2023, an increase of 49% year over year.
Furthermore, even though CrowdStrike stock is down by nearly 65% from its 2021 high, it has begun to recover from the bear market. With its price-to-sales ratio at 13 -- close to its all-time low -- the valuation and its potential for revenue growth make CrowdStrike stock a promising buy now.
Palantir
The realm of AI goes far beyond chatbots and cybersecurity platforms. This advancing technology plays a role in powering the analytics tools of Palantir. Its Gotham software platform began as a tool that government agencies could use to analyze national security threats, and it reportedly played a role in helping U.S. intelligence officials find Osama bin Laden.
However, Palantir recognized that focusing on national security was limiting its potential client base. Hence, it now applies these tools in the commercial space through its Foundry platform, which enterprises in various industries can use to identify inefficiencies and cut costs.
Both Gotham and Foundry use AI to build machine learning models that can be applied to trustworthy data sets and continuously improved through user feedback. The results are end-to-end analytical tools that offer insights that organizations can integrate into their operations.
Interest in these platforms continues to grow. In 2022, Palantir's revenue rose 24% to $1.9 billion. Furthermore, its annual net losses shrank from $520 million in 2021 to $371 million in 2022. Stock-based compensation costs, which amounted to $565 million in 2022, continue to weigh heavily on its bottom line. Nonetheless, Palantir eked out a $33 million profit in Q4 and reported $203 million in adjusted free cash flow for 2022.
Palantir showed additional strength as its overall customer count grew by 55%. Over time, that growth could boost the software-as-a-service stock as more enterprises turn to Foundry to identify areas where they can improve efficiency.
Like many other growth companies' stocks, Palantir's stock price suffered last year, and it is now down 85% from its early 2021 high. But its P/S ratio has surged upward from the record low below 7 it hit a couple of months ago to around 11 now, which could signal the beginning of its AI-driven recovery.
