The launch of OpenAI's ChatGPT ushered in a wave of investor excitement for generative artificial intelligence (AI). One of the biggest beneficiaries of this trend is Nvidia, which helps make the technology possible with its cutting-edge computer hardware. But the software side of the opportunity is also exciting.
Let's explore how Adobe (ADBE 0.87%) and Palantir Technologies (PLTR 3.73%) can leverage AI to revolutionize their consumer and enterprise-facing businesses.
1. Adobe
With shares up by 61% year to date, the market hasn't overlooked Adobe's AI potential. The productivity software company's business is hugely synergistic with AI. And Adobe has already begun rolling out the technology across its ecosystem. Consistent profits and a reasonable valuation are the icing on the cake for investors.
Since its founding in 1982, Adobe has specialized in helping people and enterprises make, edit, and design content with software like PostScript, Adobe Illustrator, and Premiere Pro. Generative AI can help simplify the use of these tools.
And in September, Adobe launched Firefly, a family of AI models allowing users to edit and create content using voice and text prompts. While this is currently limited to images, Adobe plans to expand to other workflows like video editing, illustration, and 3D modeling.
FireFly can help protect Adobe's economic moat while increasing the functionality of its tools -- boosting their growth potential and pricing power. The new platform is also ideal for enterprise clients who can create content without worrying about legal or copyright challenges because it is trained on Adobe's own library of images and video.
With a forward price-to-earnings multiple of 30, Adobe's valuation looks reasonable, especially considering its strong bottom-line momentum. In the third quarter, net income jumped almost 24% to $1.4 billion.
2. Palantir Technologies
Like Adobe, Palantir Technologies is a Software-as-a-Service (SaaS) company that enjoys synergies with generative artificial intelligence. While it has historically suffered from challenges like slow top-line growth and overvaluation, new revenue streams could help turn the story around.
Founded in 2003, and going public through a direct listing in 2020, Palantir specializes in analyzing large data sets to discover actionable insights for public and private sector clients.
In government contracts, which represent around 57% of company revenue, this can involve helping federal agencies assign resources on limited budgets or creating digital records to be used for surveillance and policing.
Image source: Getty Images.
These tasks are well suited to AI, which can help Palantir automate its workload or expand its services. And this year, the company launched its Artificial Intelligence Platform (AIP), designed to combine its existing machine learning tools with new large language models, which can boost their effectiveness.
The company also won a $250 million contract with the U.S. Army to research AI technology, which is a big vote of confidence in the quality of its platform and expertise in the field.
Palantir's second-quarter revenue grew 13% year over year to $533 million, which is not great considering its price-to-sales multiple of 17. That said, the market seems confident that its new AI-related tools can dramatically boost growth. And that story looks likely to play out over the long term.
Which stock is right for you?
While Adobe and Palantir are both excellent ways to invest in the adoption of generative AI technology, they serve different investment strategies.
As a large blue chip company with a good valuation, Adobe is the safer bet. Palantir is smaller and more speculative because its valuation is very high compared to current performance, so it will have to benefit substantially from AI-related growth drivers to justify its price tag.
