One of my favorite technology research analysts is Dan Ives of Wedbush Securities. About a month ago he referred to the boom in artificial intelligence (AI) as a "1995 moment" for the technology sector. For those of you who don't get the reference, he's talking about the widespread adoption of the internet and how it impacted the world thereafter. I've been suspicious for a while that AI is quickly mutating into Wall Street's new favorite buzzword (a la "metaverse" or "blockchain").  

While AI applications are in their early days, two companies in particular appear to be well ahead of the curve. Both Palantir Technologies (PLTR 4.49%) and Meta Platforms (META -0.40%) have showcased some progress on the AI front. And it's exciting. What is even better is that despite each stock's generous 2023 return so far, I do not believe the hype of AI is priced in.

Let's dig in and see what each company is up to and assess if now is a good time to buy these stocks.

double exposure image of virtual human 3dillustration on programming and learning technology

Image source: Getty Images.

1. Palantir Technologies

A couple of weeks ago I wrote an article suggesting that investors keep one item in particular in mind during Palantir's second-quarter earnings call: the company's AI platform, Palantir AIP, which was released earlier this year.

Palantir just released earnings for the quarter ended June 30, and just about everything was positive news. The company reported its third consecutive quarter of generally accepted accounting principles (GAAP) profitability, and raised its guidance for both the third quarter and all of 2023. In addition, the company announced a share buyback program of up to $1 billion.

While this is all well and good, it was management's commentary around AIP that has me most excited. In his shareholder letter, Palantir's CEO, Alex Karp, told investors that AIP is already deployed in over 100 organizations and that the company is in discussion with more than 300 additional enterprises.

Examples of Palantir's AI clients.

Image source: Palantir Q2 2023 earnings presentation.

This level of growth and surge in demand seems otherworldly. The picture above illustrates some of the companies that use AIP, as well as Palantir's other software products. At first glance, this is an impressive client roster sample. Perhaps the most impressive number from the company's earnings presentation was its 38% client count illustration as seen below. This trend underscores how much demand there is for Palantir and its suite of AI software platforms.

Palantir's Client Growth Over Time.

Image source: Palantir Q2 2023 earnings presentation.

What I find particularly interesting is that some of Palantir's big tech cohorts, like Microsoft, which is also aggressively investing in AI, did not necessarily provide investors with the most confident guidance or outlook. Yet, Palantir, which has a much smaller balance sheet than Microsoft and is also battling the same cloudy economic environment as its competition, signaled just how popular its suite of AI products is by raising its guidance.

2. Meta Platforms

For much of 2023, Meta investors have been laser-focused on the company's "year of efficiency." While the Q2 earnings call illustrated that the majority of cost-reduction efforts have been achieved, the longer-term picture still needed some clarity.

During the call, management went into detail on the company's product roadmap and made it clear that AI will be powering much of Meta's efforts in the metaverse and beyond. Specifically, investors learned about Meta's AI-powered content and how these efforts have resulted in more time spent on the platform, thereby driving higher monetization on Facebook and Instagram.

Like its ad-heavy competitor, Snap, Meta is heavily invested in showcasing return on investment for its advertisers. It is interesting to see that while Snap harped on AI efforts during its earnings call, its near-to-intermediate-term outlook called for shrinking growth. By contrast, while reviewing its AI initiatives, Meta disclosed that almost all advertisers are using at least one AI product and signaled a bullish top-line outlook for Q3, which could be an indicator of the company's superior technological progress.

Can these stocks realistically go higher?

^SPX Chart

^SPX data by YCharts

The chart above illustrates both Meta and Palantir stock benchmarked against the S&P 500 so far this year. While the returns are nice to look at, traditional valuation metrics are a good indicator of how each stock compares to cohorts.

As of the time of this article, Palantir trades at a 19 times price-to-sales (P/S) ratio. By comparison, big-data analytics company Snowflake trades for nearly 24 times P/S, while Microsoft trades at an 11 P/S valuation. Microsoft is a more mature, blue chip company than Palantir. Nonetheless, investors can see that for big data and AI companies this cohort shows a pretty wide disparity of trading multiples.

While Palantir is on the higher end of these valuation multiples, the stock is still trading for less than half its all-time highs from 2021. I believe the stock is headed higher and now could be a really interesting time to initiate a position. The AI arms race will likely be a years-long event. But with that said, I think it will become more clear who is emerging as the leaders of the pack over the next few years. For this reason, Palantir could be a great stock to dollar-cost average into over time while the company unfolds its AI vision.

Given Meta's year-to-date returns, the stock likely needs a breather. As of the time of this article, Meta trades for roughly a 7 P/S ratio. By comparison, ad-heavy platforms Alphabet, Amazon, and Snap trade for P/S ratios of 5.7, 2.7, and 3.8, respectively. 

While Meta is tempting, it currently trades at a premium to comparable companies. But with that said, I believe the surge in Meta's price action this year is largely driven by its execution on cost-reductions and return to growing profits. Although the stock may be a tad overbought at the moment, the long-term thesis is intact. Meta stock could be a really compelling buy on pullbacks throughout the second half of the year.