The elevated interest in artificial intelligence (AI) this past year resulted in elevated stock prices for companies positioned to take advantage of this fast-growing and potentially lucrative technology. Did I say lucrative? AI is expected to contribute $15.7 trillion to the global economy by 2030, according to a forecast by PwC.
One big beneficiary was Nvidia (NVDA 6.18%) which saw share prices more than triple so far in 2023. The chipmaker provides critical hardware required to train AI models and run inference applications. Meanwhile, share prices of Palantir Technologies (PLTR 3.73%) also took off this year thanks to the AI hype, surging by nearly 159%.
But don't worry too much about missing out. Both these stocks have a lot of room and great potential to rise higher in the long run as they take advantage of multibillion-dollar niches in the AI realm.
Let's look at the key catalysts that could help these two AI stocks maintain their red-hot rallies.
1. Nvidia
Nvidia's terrific stock price surge this year can be traced, in part, to its outstanding fiscal 2024 second-quarter results and to the fiscal Q3 guidance it delivered at the end of August. In Q2 (ended July 30), its revenue increased 101% year over year to $13.5 billion. The company anticipates even faster year-over-year revenue growth of 170% to $16 billion in the current quarter.
This eye-popping revenue bump also supercharged Nvidia's bottom line, especially because of the terrific pricing power it has in the market for AI chips. Its non-GAAP net income jumped 429% last quarter to $2.70 per share. And Nvidia seems to be in a solid position to sustain its fantastic growth given a potential jump in the output of its AI graphics cards next year.
The demand for Nvidia's AI-optimized graphics processing units (GPUs) is so solid that its foundry partner Taiwan Semiconductor Manufacturing, also known as TSMC, says that the current shortage for the former's AI chips could last for the next 18 months. The Taiwan-based chip manufacturing giant adds that it has been able to fulfill only 80% of Nvidia's needs thus far.
This explains why TSMC has been working to expand its production capacity, which could help Nvidia fulfill more customer demand. British daily newspaper Financial Times anticipates Nvidia's production of its flagship H100 AI GPUs will be 2 million units in 2024. That would be a fourfold jump from this year's estimated production of 500,000 units.
Given that the H100 is priced at $40,000, Nvidia could pull in $80 billion in revenue from just that one product next year if it can hit the Financial Times' estimate. For comparison, Nvidia is expected to generate $54.7 billion in revenue this year, of which around $25 billion to $30 billion could come from sales of AI chips, according to Mizuho analyst Vijay Rakesh.
By 2027, Nvidia's AI-specific revenue could jump tenfold, asserts Rakesh, who believes that the company could control 75% of the AI chip market at that time. All of this supports the idea that Nvidia's AI-driven surge is just getting started.
Analysts expect the company to clock a faster annual earnings growth rate of almost 79% for the next five years, compared to its compound annual growth rate of 37% in the past five. A big chunk of this explosive growth will come thanks to AI, which is why investors who are still on the sidelines may want to buy Nvidia before it flies higher.
2. Palantir Technologies
While Nvidia is a play on the hardware side of AI, Palantir is on track to win big from the software side of this technology. The company, known for its key contracts to provide data analytics software platforms to U.S. government agencies, has started gaining traction in AI of late.
In June, Palantir was awarded a $463 million multiyear contract from the U.S. Special Operations Command (USSOCOM), which the company says is to "support their AI-enabled mission command platform." And the U.S. Army has given Palantir a $250 million contract for conducting research and development in the areas of AI and machine learning (ML).
The good part is that Palantir's Artificial Intelligence Platform (AIP) is gaining traction among business customers as well. Houston-based investment manager CAZ Investments has struck a five-year deal with Palantir to use AIP to support its "growth and innovation." Meanwhile, PwC is collaborating with Palantir to leverage the capabilities of AIP to help its clients create value.
It is worth noting that Palantir was listed as the No. 1 provider of AI platform software in 2021 by IDC in terms of both revenue and market share. Researchers at Future Market Insights forecast that demand for AI platform software will grow at an annualized rate of 38% through 2032, pushing its annual revenue to $254 billion that year. As such, it won't be surprising to see Palantir's AIP gain more traction. After all, AIP allows Palantir customers to deploy large language models that are used for training AI applications on its secure network.
So don't be surprised if we see an acceleration in Palantir's growth. The company expects to finish 2023 with revenue of at least $2.2 billion, which would be a 16% jump over 2022. The good part is that Palantir raised its guidance last quarter, and the company could end the year with stronger growth as its AI-focused initiatives start bearing fruit.
Palantir could be sitting on a $1 trillion revenue opportunity thanks to AI, and this explosive addressable market could send the stock soaring in the long run.
