2 Incredible AI Stocks to Buy as the Market Cools Down in 2023

While the artificial intelligence (AI)-driven market rally seems to be cooling down a bit, hardly anyone can question the paradigm shift it is causing in the field of innovation. The arsenal of new and upcoming technologies should help companies improve productivity by leaps and bounds.

Amid this change, several companies have emerged as dominant forces focused on empowering enterprises with advanced data analytics and AI technologies. Helping to lead the way are Palantir Technologies (PLTR 3.73%) and Snowflake (SNOW 3.69%).

A recent market pullback could prove an attractive opportunity for retail investors to pick up small positions in these high-quality AI stocks.

Palantir

A frontrunner in the AI race, Palantir has seen its shares soar nearly 133% so far this year. This is impressive considering the market backlash the company received in response to a perceived slowdown in growth in the second quarter.

While the second-quarter top-line performance of $533.3 million was above the company's guidance range of $528 million to $532 million, it fell slightly short of analysts' consensus estimate of $533.9 million. The company's generally accepted accounting principles (GAAP) profit of $0.01 per share, however, was in line with Wall Street's estimates.

With its advanced machine-learning (ML) technology known for effectively organizing and analyzing huge troves of data, its legacy of handling sensitive data as a defense contractor, and expertise in data privacy, Palantir is uniquely positioned to benefit dramatically in the ongoing AI revolution. In fact, CEO Alex Karp claimed that the demand for its recently launched Artificial Intelligence Platform (AIP) -- which enables clients to use the company's ML technologies, risk management practices, and large language models -- has been quite unprecedented.

The new AI service, although currently in the early stages of rollout, can play a pivotal role in speeding up the pace of customer acquisition for Palantir, which has long been a sore spot in the company's investment thesis.

Unlike many other simple off-the-shelf software offerings, purchasing and deploying Palantir's software services involves a long, multi-step process and requires the client to commit a large amount of time and money. While the initial adoption is slow, the mission-critical nature of Palantir's software ensures that the software becomes completely entrenched in the client's business in the long run. This ensures a sticky customer base, which stays mostly loyal even in times of economic turmoil.

Thanks to its robust business proposition, Palantir's billings surged by 52% year over year to $603 million, while adjusted free cash flow soared by 57.6% year over year to $96 million. The company has also authorized a $1 billion share repurchase program to return value to shareholders.

Palantir is currently trading at 16 times trailing-12-month sales and 66.9 times estimated future earnings. Since a lot of the stock's upside potential is already priced in, investors should avoid going all-in the stock. Instead, investors can start with a small number of shares and opt for a dollar-cost-averaging strategy to build a position in this stock.

Snowflake

The cloud-based data warehousing company Snowflake has been helping enterprises break "data silos" by consolidating data from disparate sources into a single, unified view that enhances decision-making. Unlike many cloud infrastructure players who have adopted the licensing or software-as-a-service (SAAS) model, Snowflake's consumption-based or usage-based pricing model gives clients the flexibility to pay only for the database and computational resources that they actually use.

Since enterprises need solid data to support a good AI strategy, Snowflake's expertise in curating and optimizing confidential enterprise data makes it an essential cog in the wheel. The company has partnered with Nvidia to make available the latter's GPU-accelerated computing capabilities and NeMo platform for developing large language models based on data cloud to its clients. The company has also launched Document AI, a large language model-based interface allowing customers to query unstructured data.

In its latest earnings report for the second quarter of fiscal 2024 (ended July 31, 2023), Snowflake reported revenue of $674 million, up 36% year over year and ahead of the consensus estimates by $12 million. The company's non-GAAP (adjusted) earnings per share (EPS) of $0.22 also beat the consensus estimate by $0.12 per share. However, the company posted a GAAP loss of $227 million, a marginal rise from the same quarter in the previous year.

Snowflake has undoubtedly witnessed a slowdown in the pace of product revenue growth and net retention rate in the past three years. However, despite these challenges, the company's adjusted gross product margin and adjusted operating margin have improved, while adjusted free cash flow is also positive.

Snowflake ended the second quarter with 402 large customers (who spend over $1 million on the company's services), a gain of 62% year over year. Finally, management has also highlighted the stabilization in bookings in the second quarter, a metric that may indicate that the pace of revenue growth may not slow down any further.

Snowflake trades at 20.8 times trailing-12-month sales, which is expensive considering the software industry median valuation multiple of 2.4. However, considering that its revenue is growing at a healthy clip (even after slowing down in the past three years), improving margins, and AI initiatives, the company can still prove to be a lucrative investment for long-term investors.