Cathie Wood's Ark Invest sold shares of Tesla and Nvidia throughout the third quarter. The innovation-focused asset management firm still has sizable positions in both companies, but with Tesla stock up 80% and Nvidia stock up 210% year to date, Ark presumably wanted to rebalance its portfolio.
In any case, the firm redeployed some capital across two other artificial intelligence (AI) stocks: Palantir Technologies (PLTR 3.73%) and Cloudflare (NET 1.44%). The former now accounts for 1.3% of its invested assets, and the latter accounts for 0.2% of its invested assets.
Read on to learn more about these AI growth stocks.
1. Palantir Technologies
Palantir specializes in data analytics. Its software helps government agencies and commercial organizations integrate, analyze, and visualize tremendous amounts of data, which ultimately leads to better decision making. Palantir supports the development, deployment, and optimization of artificial intelligence (AI) and machine learning (ML) models. Those models can be integrated into workflows and user-facing applications to drive operational efficiency.
Among data-analytics vendors, Palantir stands apart in its ability to tackle complex use cases, and the company has received its fair share of praise from industry analysts. Most recently, research company Dresner Advisory Services recognized Palantir as a leader in model operations (ModelOps), which deal with end-to-end management of the AI model lifecycle. And Forrester Research recognized its leadership among AI/ML platform vendors.
Palantir reported strong financial results in the third quarter, beating estimates on the top and bottom lines. Its customer count climbed 34% to 453, revenue rose 17% to $558 million, and generally accepted accounting principles (GAAP) net income improved to $72 million, up from a loss of $124 million last year. Palantir has now been profitable on a GAAP basis for four consecutive quarters.
Investors should be aware of the revenue-concentration risk. Palantir only has 453 customers, and the top 20 accounted for 51% of sales over the past year. Losing any of those customers could be a significant setback for the company. But Palantir is working to correct that problem by allowing customers to adopt its platform components incrementally.
Looking ahead, CFRA Research expects big data and business-analytics spending to compound at 13% annually to approach $350 billion in 2025. But investors can expect Palantir to grow more quickly due to its strong presence in the AI/ML platforms space. Indeed, Morgan Stanley is forecasting revenue growth of 20% annually over the next five years.
However, even in that context, its current valuation of 19.8 times sales looks a bit pricey, especially when the two-year average is 13.6 times sales. Personally, I would wait for a cheaper multiple before buying Palantir stock.
2. Cloudflare
Cloudflare provides a broad range of services that improve the performance and security of corporate applications and infrastructure. The company operates the fastest cloud network on the market, and its platform handles about 20% of public internet traffic. That creates a network effect that would be "very difficult for other competitors to catch up with," according to CEO Matthew Prince.
Specifically, Cloudflare has deep insight into performance issues and security threats across the internet, and each data point enhances its ability to route traffic and prevent attacks, making its network faster and more secure. In turn, Cloudflare is a recognized leader in several relevant cloud verticals, including content-delivery network software, web-application protection, zero trust network access, and edge-development platforms.
Cloudflare reported solid financial results in Q3. Revenue increased 32% to $336 million and non-GAAP net income soared 189% to a record $55 million. The driving forces behind those numbers were a 17% increase in paying customers compounded by a 16% increase in spend per customer. Investors can expect similar momentum in the future.
Cloudflare values its addressable market at $146 billion. Zero trust networking and developer services -- two markets where the company enjoys a strong presence -- account for most of that total. Management is optimistic about its growth prospects in both spaces.
Cloud migration and digital transformation make network modernization and cybersecurity imperative, and explosive interest in AI is driving demand for developer services. In fact, Prince says Cloudflare Workers is the most commonly used developer platform among leading AI start-ups, and he believes the company is "uniquely positioned to become a leader in AI inferencing."
On that note, Morningstar expects Cloudflare to grow revenue at 34% annually over the next five years. That monster growth forecast makes its current valuation of 17.7 times sales look reasonable, and that multiple is an absolute bargain compared to the three-year average of 40.1 times sales. Investors should feel comfortable buying a small position in this growth stock today.
