Artificial intelligence (AI) has become an investing hot topic since the calendar flipped to 2023. This isn't a coincidence, as many high-profile companies are rolling out AI-powered chatbots to the general public. While these are significant developments, the reality is that many companies have been using the power of AI for much longer.
CrowdStrike (CRWD 2.30%) and Palantir (PLTR 2.44%) harnessed AI to crunch data for their platforms since their formation, making them AI leaders in their respective industries. Each stock has reached a screaming-buy point, and investors need to keep these two stocks on their radar. Here's why they could be staples in your portfolio to gain exposure to the AI revolution.
1. CrowdStrike
CrowdStrike competes in the cybersecurity space with its endpoint security solutions. This type of software secures any endpoint that might access a company's network, such as a phone or laptop.
CrowdStrike deploys AI by analyzing trillions of signals every week to determine what is a normal use or a threat. By training its AI systems to detect these breaches, it can also quickly shut down an attack before any actual loss happens.
But that's just the beginning. CrowdStrike has more than 20 offerings that expand on this primary product, making it a one-stop shop for many cybersecurity-related products.
As more customers add products, CrowdStrike's revenue rises. With over half of the customers using at least five products and annual recurring revenue up 48% to $2.56 billion in the fourth quarter of 2023 (ended Jan. 31), CrowdStrike has demonstrated the appeal of its products.
| Number of Modules Customers are Using | Percent of Customer Base | YOY Growth |
|---|---|---|
| 5 or more | 62% | 52% |
| 6 or more | 39% | 62% |
| 7 or more | 22% | 75% |
Data source: CrowdStrike. YOY = year over year.
CrowdStrike also produces loads of free cash flow (FCF) from that revenue stream. In the fourth quarter, it produced $209 million in FCF, giving it a 33% margin. If CrowdStrike can maintain that margin in 2023 and hit its fiscal 2024 revenue target of $2.985 billion, it will produce nearly $1 billion in FCF this fiscal year.
This means CrwodStrike trades at an attractive 31.5 times forward FCF, making it cheaper than Microsoft, which trades at 34.2 times forward FCF.
CrowdStrike is growing much faster than any of its peers, with an impressive business model and strong finances. With the stock trading at a cheap valuation, it's a no-brainer buy here.
2. Palantir
While CrowdStrike uses AI to comb through data, Palantir uses AI with a different result. Its software allows users to generate insights from mountains of data, whether that is allegedly tracking down Osama bin Laden or determining where to direct an incoming hospital patient.
Image source: Palantir.
Customers can see massive impacts. For example, Tyson Foods used Palantir on over 20 projects, creating more than $200 million in cost savings.
As data becomes more integral to businesses' operations, Palantir will emerge as a top platform to give its clients an edge over their competitors.
While the company isn't seeing massive growth like CrowdStrike, it's still quite impressive. In the fourth quarter, revenue rose 18% to $509 million. But the big news was its profitability: Palantir generated GAAP earnings per share (EPS) of $0.01. While that isn't anything mind-boggling, every company has to start somewhere.
And its profitability wasn't a one-time thing. For 2023, management expects revenue to grow by 16% year over year and to produce some amount of net income based on generally accepted accounting principles (GAAP).
Despite these solid results and great projections, Palantir's stock isn't valued very highly. The stock trades for 8.8 times sales, a significant discount to CrowdStrike.
CRWD PS ratio data by YCharts. PS = price-to-sales ratio.
With Palantir reaching profitability and still growing steadily, the stock looks like a strong buy, especially with the upside of its AI-powered data analytics software.
