Artificial intelligence (AI) stocks as a group have benefited recently from the publicity surrounding ChatGPT. That new technology has allowed investors to see the power of AI more clearly, and its prospects could redefine the potential of AI companies and their stocks.
But even after the significant increase some AI stocks have enjoyed in the past few months, some may only be at the beginning of their recovery stages. In the view of three Motley Fool contributors, stocks like Microsoft (MSFT -1.96%), SentinelOne (S -4.83%), and Palantir (PLTR -3.40%) could surge much higher as the next stage of the AI revolution fully takes hold.
Does Microsoft's alliance with OpenAI make it the new king of AI?
Jake Lerch (Microsoft): When CEO Satya Nadella took over at Microsoft in 2014, he promised to turn the software giant into a cloud computing powerhouse.
Mission accomplished. Today, Microsoft is one of the leading cloud computing companies in the world and the second-largest U.S. company overall. But for Microsoft to succeed over the next decade, the company must embrace a new technology: artificial intelligence.
It's already off to a great start. Microsoft partnered with OpenAI, the company behind the ChatGPT craze. But in January, it extended and increased that partnership by investing a further $10 billion into OpenAI.
That opens the door to further integrations of ChatGPT into several Microsoft segments, such as:
- Microsoft Office
- Azure Cloud
- Xbox gaming
- Bing online search
Each of these products would benefit by incorporating ChatGPT into its customer interface -- as it's clear the chatbot is already a smash hit with the public.
However, the Bing search tool might be the product with the most to gain. Suppose the company can capitalize on ChatGPT's integration with Bing. In that case, Microsoft may finally threaten Alphabet's stranglehold on the online search market.
Bear in mind that online search is a massive market, and Alphabet dominates it with a share of more than 80%, compared to less than 10% for Bing. Last year, Alphabet generated over $162 billion in revenue from Google's online search segment; Microsoft made 'only' $11.6 billion from search advertising in its fiscal 2022, which ended in June.
If Bing can eat into Google's enormous share of the online search market, it could be a game-changer for Microsoft. And that could quickly propel its stock price higher.
SentinelOne is making up ground in the cybersecurity space
Justin Pope (SentinelOne): Cybersecurity is one of Wall Street's hottest investment themes, and for a good reason: Breaches cost enterprises millions of dollars. Prevention is the best medicine, which is where SentinelOne comes in. It's among a new generation of cybersecurity companies, selling sophisticated software that's miles ahead of the antivirus software you likely grew up using.
But SentinelOne is unique in its field. Its Singularity platform uses behavioral AI to detect suspicious files and threats. The company claims it can offer a machine-speed response to threats, beating competitors that rely on human analysts to check flagged items. SentinelOne scores very high on benchmarks such as MITRE's ATT&CK Evaluations, and research firm Gartner gave it the top rank in endpoint protection.
SentinelOne is quickly attracting new business. Revenue grew 106% in its fiscal 2023, which ended Jan. 31. As the charts below show, it's growing faster than its key direct competitors, though it's still a much smaller company.
S Revenue (Quarterly YoY Growth) data by YCharts.
SentinelOne was one of Wall Street's hottest names when it went public in June 2021, commanding a high price-to-sales ratio that plummeted to earth during this bear market, falling from a peak of 106 to around 10 today. Market analysts now believe shares are undervalued. Their average 12-month price target of $18 implies a 25% upside.
But I encourage you to think long-term. The company recently guided for 50% revenue growth this year, which would be impressive in this unstable economic environment. If SentinelOne keeps up its strong growth, investors five years out might laugh at the idea that its shares once traded for $14.
AI is the key to insights and profits for this stock
Will Healy (Palantir): Most Palantir investors know its software packages, Gotham and Foundry, use big data to deliver insights in the national defense and commercial realms, respectively. This ability to discern possible solutions helps it stand out from its big data peers.
However, they may not know that artificial intelligence and machine learning (AI/ML) are at the center of such insights. Whether that makes Palantir the best AI stock is a matter of debate. Nonetheless, AI/ML technology allows it to utilize and integrate data from downstream operations, taking a reliable data set and continuously improving it through feedback and evaluating user decisions.
Palantir also stands out with its Micro Models ecosystem. Rather than building one comprehensive model, the Micro Models approach allows its clients to address specific smaller parts of a problem before integrating them into one larger model that addresses the overarching issue. This approach can help standardize outputs, allowing integration into an overall framework.
Although Palantir started as a defense industry-oriented platform, its commercial-focused Foundry offering will likely drive most of its growth. Between 2018 and 2022, commercial revenue grew at a compound annual rate of 72%, from $38 million to $335 million.
That success has not fully turned Palantir around, however. Its year-over-year revenue growth of 18% in Q4 fell well below the company's goal of 30%. Also, the fact that in 2022, revenue grew by 24% overall (to $1.9 billion) shows it has fallen short of that goal on a longer-term basis. Additionally, in 2022, its net losses attributable to shareholders fell to $374 million from $520 million in the prior year. That smaller loss may offer little comfort to investors increasingly focused on profits.
Still, signs of improvement have begun to appear. Analysts forecast that Palantir's revenue growth will accelerate starting in 2024.
The stock is up by about 30% year to date. But considering Palantir is still down more than 80% from its all-time high, it is likely not too late to get into this stock. With its price-to-sales ratio at 9 -- a level just above its all-time low -- its valuation may also give hesitant investors an incentive to take a chance on Palantir.
