Accelerating interest in the potential of artificial intelligence (AI) has been a major spark for the stock market in 2023. While it's far from being the first hot tech trend to get investors revved up, it would be an absolute mistake to write off this year's AI explosion as a flash in the pan.
The AI revolution has only just begun, and it stands to deliver incredible profits for those who back the right companies. With that in mind, read on to see why two Motley Fool contributors think investors can score wins by building positions in promising AI stocks Alphabet (GOOG 1.25%) (GOOGL 1.20%) and Palantir (PLTR 6.22%).
AI can make a good thing even better for Alphabet
Parkev Tatevosian (Alphabet): Given all the hype around AI already this year, it isn't easy to find discounted stocks that will benefit significantly from the technology's potential. Market participants quickly pounced on all sorts of companies that utilize AI. Alphabet stock, for instance, is trading about 13% off its all-time high. And yet, the stock is still an excellent value right now.
Alphabet's business is ripe to benefit from the rising effectiveness of AI. One example of this relates to recommender systems. My family often ribs me about scrolling through the Netflix streaming app for an eternity before picking something to watch. If Netflix's recommender system could highlight things I like better, it would make the service more valuable for me (and reduce the family's complaints). The same holds true for Alphabet's YouTube service. If YouTube's AI recommender is working well, I'll likely be on the app longer. The platform makes its money primarily by showing advertisements to folks watching content, so more time spent on it means more opportunities to show ads. AI will prove vital to its future growth.
Alphabet's dominant search engine, Google, also gets a boost from AI. The more effective the search is at discerning what folks think is relevant, the more likely it will increase user engagement. Alphabet has been improving its AI for years and keeps improving it incrementally. That has helped the company increase its operating income from $15.4 billion in 2013 to $74.8 billion in 2023. If AI can continue to help Alphabet increase profits even modestly, the benefit will be billions of dollars in additional profit.
GOOGL PE Ratio (Forward 1y) data by YCharts
Even though Alphabet's stock is not down significantly when measured by its market price, investors buying in right now should appreciate that they are still getting a good deal purchasing Alphabet at a forward price-to-earnings ratio of just under 20. That's a bargain when considering the potential for this premium stock.
Palantir could be poised for a massive run
Keith Noonan (Palantir): After getting crushed by macroeconomic headwinds last year, Palantir stock came roaring back in 2023. But even after some explosive gains powered by excitement surrounding the company's opportunities in AI, its share price is still down about 58% from highs reached in January 2021. A much bigger comeback may still be heating up.
Palantir launched its Artificial Intelligence Platform (AIP) in May, and the suite of enterprise-focused tools and services has already seen encouraging levels of adoption and helped boost business performance. The platform combines the company's existing data analytics and machine-learning technologies with new large-language-model and AI tools. Over 100 commercial customers have adopted AIP, and Palantir is in conversation with 300 other business customers who may be interested in using the service.
Palantir's total customer count grew 38% year over year in the second quarter and 8% on a sequential basis. The number of U.S. commercial customers rose 35% year over year, expanding to 161 from 119 at the end of last year's second quarter. With revenue from commercial customers climbing 10% year over year and sales to government customers climbing 15%, Palantir's total revenue rose 13% year over year in the second quarter to hit $533 million.
Even better, Palantir's midpoint guidance calls for sales growth to accelerate to 16% year over year in the current quarter. The company also raised its full-year guidance to sales above $2.212 billion -- good for annual growth of nearly 16% and an improvement from its previous guidance range for sales between $2.185 billion and $2.235 billion. Adoption and usage scaling for AIP is still in the early stages, but it's already proving to be a significant performance catalyst for the business.
PLTR PE Ratio (Forward) data by YCharts
And while Palantir's valuation already factors in strong forward performance, the company is now posting profit on a GAAP basis and looks poised to continue doing so amid a backdrop of accelerating sales growth.
The data software specialist has established an early leadership position in its corner of the AI market. Early leadership could develop into long-lasting competitive advantages that allow it to benefit disproportionately from rising demand for AI technologies.
There's undoubtedly some speculation involved in charting Palantir's outlook. But the stock's massive upside potential makes it a worthwhile long-term play for risk-tolerant investors seeking explosive opportunities in AI.
