As 2023 comes to an end, we close the chapter on one of the most exciting times for the technology industry in recent memory. After its launch late last year, OpenAI's conversational chatbot, ChatGPT, sparked a tidal wave of interest in generative artificial intelligence (AI) that sent the chipmaker Nvidia's revenue and share price soaring. But as the industry begins to mature, look to see new companies benefit from this burgeoning opportunity.
Let's discuss why Palantir Technologies (PLTR 1.88%) and Advanced Micro Devices (AMD 1.12%) could make excellent buys in December and beyond.
1. Palantir Technologies
While Palantir Technologies still trades at a sharp discount to its all-time high of $39, reached in early 2021, its future looks brighter than its past. Management has fleshed out a convincing plan to incorporate generative AI into the company's existing data mining business, and burgeoning profitability is icing on the cake for investors.
Despite hitting public markets through a direct listing in 2020, Palantir is not new. Founded in 2003, the company has a long history of helping the U.S. government by identifying actionable patterns in large amounts of data. And these deep government connections can help it continue to land clients that benefit from its reputation for security and expertise. Recently, this has included the Ukrainian armed forces, which uses its software for military targeting, according to Palantir's CEO Alex Karp.
Palantir can expand the usefulness of its existing tools by synergizing them with large language models, which can generate insights from data in real-time scenarios like battlefields, for example. The company recently won a $250 million contract with the U.S. Army to research and experiment with the new technology -- possibly a sign of more deals to come.
With a forward price-to-earnings (P/E) ratio of 70, Palantir stock is quite expensive going into December. For context, the S&P 500 has an average of 25. But for investors, the company's swing to profitability (over the trailing 12 months) is good news because now it has a solid foundation to pursue its long-term growth drivers. Third-quarter income stood at around $80 million, up from a loss of $124 million in the prior-year period. And the rapid bottom line improvements mean Palantir can eventually grow to justify its price tag.
2. Advanced Micro Devices
With shares up 89% year to date, AMD had a good run in 2023 -- despite lackluster revenue growth this year. While the company has been relatively slow to capitalize on AI hardware demand, this business looks set to scale up in the fourth quarter of 2023 and the full year 2024. A rebound in AMD's PC business will also help support its valuation.
Image source: Getty Images.
Perhaps no company has benefited more from rising AI hardware demand than AMD's rival Nvidia, a leader in making advanced graphics processing units (GPUs) for AI training and deployment. However, the opportunity is ripe for competition because of supply constraints and high prices. AMD aims to solve this problem by manufacturing and selling its own advanced MI300 chip that can match or exceed the performance of Nvidia's flagship H100 for training AI applications.
While AMD's third-quarter revenue only increased by 4% year over year to $5.8 billion, investors are more interested in guidance. According to CEO Lisa Su, the company expects GPUs to add a whopping $400 million in fourth-quarter revenue, exceeding $2 billion in 2024. Investors can also look forward to growth in the client segment (where AMD sells PC components) as macroeconomic pressures like inflation fade. This business grew sales by an impressive 42% year over year to $1.5 billion on higher demand for its Ryzen mobile processors.
With a forward price-to-earnings (P/E) multiple of 33, AMD isn't cheap. But the company looks set to justify its price tag as its AI chip business scales up.
Expect the industry to mature
Over time, the AI industry will become more mature. And it will be important for investors to bet on companies that can set themselves apart from their rivals. AMD has a strong track record of competing with Nvidia in the GPU market, while Palantir's government connections will make it difficult for other companies to encroach on its niche. Both stocks are an excellent way to invest in this exciting technology megatrend.
