Artificial intelligence (AI) has become a buzzword in 2023 and for good reason. According to research from the McKinsey Global Institute, generative AI has the potential to increase global corporate profits by $4.4 trillion annually.
Unsurprisingly, AI stocks also stand to benefit dramatically in the case of a potential bull market. Although no one can definitively tell whether we are currently in a bull market or not, investors focused on generating long-term wealth can consider buying small positions in promising AI stocks such as Palantir Technologies (PLTR 0.68%) and Microsoft (MSFT 1.44%).
Here's why shares of these companies are well-positioned to soar even higher in the coming months.
1. Palantir
Long before AI and machine learning became buzzwords, Palantir's cutting-edge software solutions -- including Gotham, Apollo, and Foundry -- were leveraging these technologies to analyze huge troves of data and derive actionable insights for its government and commercial clients.
Launched in April 2023, Palantir's Artificial Intelligence Platform (AIP) is also proving to be a major growth catalyst. Combining the power of large language models in its core machine learning algorithms, AIP enables users to interact and receive automated responses (a chatbot experience). Within five months of launch, AIP has been used by nearly 300 enterprise clients.
Palantir's recent go-to-market strategy, AIP Bootcamp, is also expected to accelerate the pace of customer acquisition for the company. Unlike traditional pilot projects that require one to three months, Palantir has managed to deliver real-time workflows to prospective clients within five days. This initiative has enabled the company to simultaneously approach multiple clients through multi-organization boot camps, reduce time to market, and ensure deep engagement of its IT team. Furthermore, these boot camps are also leading to expanded usage of the company's technologies by existing clients while also resulting in better unit economics.
Palantir reported impressive numbers in the third quarter with revenue and earnings surpassing consensus estimates. The company also posted its fourth consecutive quarter of positive net income. The total number of customers grew by 34% year over year to 453. The company also saw an acceleration in the pace of high-value deals, closing 80 deals valued at $1 million or more, 29 valued at $5 million or more, and 12 valued at $10 million or more in the third quarter.
Trading at a price-to-sales multiple of 21.5, Palantir is valued significantly higher than the software industry median multiple of 2.1. However, considering the broad customer base comprising multiple high-value clients, its impressive strategy to reduce conversion times for larger clients, and its improving financials, the premium valuation seems justified.
Coupled with the additional revenue streams from increased penetration of AIP in the global AI market (estimated to be worth $1.8 trillion by 2030), Palantir may see significant share price appreciation in the coming months.
2. Microsoft
Previously known mainly for its personal computing business (Office productivity suite), Microsoft now has a strong presence in several other rapidly growing markets such as cloud computing, search advertising, and cybersecurity.
Microsoft's $13 billion investment in OpenAI, creator of the widely famous chatbot ChatGPT, has also proven to be a masterstroke for this tech titan. Thanks to this strategic partnership, the company has been successfully integrating AI technology across its core offerings such as Azure, Bing, and Office 365 -- making them more efficient and cost-effective for customers.
For the past few years, the Azure cloud computing business has become a major revenue driver for Microsoft. In the first quarter of its fiscal 2024 (ended Sept. 30, 2023), the Intelligent Cloud segment saw a 19% year-over-year jump in revenue to $24.3 billion -- driven mainly by a 28% year-over-year jump in constant-currency revenue of Azure and cloud services business.
Microsoft expects cloud spending optimization to be a persistent trend in the cloud business, although the impact was higher in the past few quarters. Morgan Stanley analyst Keith Weiss expects the impact of this trend to lessen in the coming quarters. Nevertheless, increasing consumption and monetization of AI models and services (OpenAI models as well as other proprietary and open-source models) is proving to be the major growth catalyst for Azure. At the end of the first quarter, more than 18,000 organizations were using the Azure OpenAI service.
Microsoft is also gearing up for new revenue streams by monetizing several of its AI-powered assistants or Copilots. Prominent among them is Microsoft 365 Copilot, which was made generally available to enterprises on Nov. 1. Priced at $30 per month, this AI assistant is expected to make a meaningful contribution to the company's revenue -- considering that the Microsoft 365 productivity suite has nearly 345 million paid seats. Its already existing GitHub Copilot is used by 1 million paid users across 37,000 organizations. Priced at $100 per seat per year, this AI assistant has helped increase overall developer productivity by up to 55%.
Besides a robust diversified business model, Microsoft also boasts enviable financial numbers. The company surpassed analysts' consensus estimates for both revenue and earnings in the first quarter. The company also has a stellar balance sheet with $144 billion cash and $105.7 billion total debt.
Considering Microsoft's strength in the enterprise software and cloud computing business, AI tailwinds, and strong financial prospects, the company is an attractive pick now.
