Cathie Wood is the founder and CEO of Ark Invest, an asset management company focused on disruptive technologies like artificial intelligence (AI). In a somewhat contrarian move, the company has been paring down its position in Nvidia for months and continued to do so throughout February.
Investors may find that surprising. Nvidia graphics processing units (GPUs) are the compute engines behind the most advanced AI systems, and the company holds an estimated market share in machine learning chips that exceeds 80%, according to The Wall Street Journal. But the stock is up some 400% over the last 18 months, so Wood and her team have been redeploying profits across other AI stocks.
For instance, Ark purchased shares of Palantir Technologies (PLTR 3.73%) and Pinterest (PINS 4.04%) throughout February.
1. Palantir Technologies
Palantir delivered better-than-expected results in its fourth quarter (ended Dec. 31, 2023). Its customer count jumped 35% to 497, and the average customer spent 8% more. In turn, top-line growth accelerated sequentially for the second straight quarter, with revenue rising 20% to $608 million. The company also achieved its fifth straight quarter of GAAP profitability, with net income tripling to reach $93 million.
Management attributed those strong results to momentum with its Artificial Intelligence Platform (AIP) product, which launched last year. CEO Alex Karp's shareholder letter stated that demand for AIP is "unlike anything we have seen in two decades." He also mentioned that the company has a more robust product pipeline today than at any point in history.
Palantir sees its software as fundamentally different from other products on the market. Its primary platforms (Gotham and Foundry) let customers integrate data and machine learning (ML) models to build ontologies, maps that link digital data to physical assets. Users can surface ontology data through analytical applications that improve decision-making. AIP brings support for large language models to those platforms.
Forrester Research has recognized Palantir as a leader in AI/ML platforms, and Dresner Advisory Services has recognized Palantir's leadership in model operations (ModelOps), a discipline that deals with managing the development, deployment, and optimization of analytical models. Those accolades tell investors the company is doing something right but also tell prospective customers that Palantir's software is worth consideration.
Turning to the future, Palantir has powerful tailwinds behind its business. A recent survey from Morgan Stanley showed that data analytics and AI/ML solutions are the two IT categories likely to see the largest spending increases in 2024. Wall Street analysts expect Palantir to grow sales at 21% annually over the next five years.
However, the stock looks expensive after climbing 50% in the past month. Shares currently trade at about 25.7 times sales, a significant premium to the three-year average of 17.9 times sales and a pricey multiple relative to the sales growth forecast by Wall Street. I'm passing on Palantir right now but am keeping the stock on my watchlist.
2. Pinterest
Pinterest reported encouraging financial results in the fourth quarter. Monthly active users increased 11% to 498 million, reflecting user growth across all three geographic groupings (North America, Europe, and rest of world). Revenue rose 12% to $981 million, marking the fifth consecutive quarter of accelerating top-line growth. And non-GAAP net income soared 80% to $366 million due to disciplined expense management.
Looking ahead, digital ad spending is expected to increase at 15% annually through 2030, according to Grand View Research. Wall Street expects Pinterest to grow revenue at the same pace over the next five years. But that forecast leaves room for upside if the company continues to make progress on its strategic priorities: (1) growing users and deepening engagement; (2) improving monetization per user; and (3) driving profitable growth.
The company is tackling those goals by investing in artificial intelligence. The machine learning models that power recommendations on the platform have increased 100-fold in size in the last two years, improving its ability to surface relevant content. That undoubtedly contributed to the strong user growth Pinterest reported in the fourth quarter.
It also helped the company monetize its platform more successfully. Average revenue per user rose 2% to $2 in the fourth quarter.
Pinterest is still investing in AI product development. The company is currently experimenting with generative AI search guides that help users narrow broad queries into specific ideas, and it recently added an AI-powered organization feature that automates content curation. Those innovations could drive more engagement, thereby feeding more data through the machine learning models that power recommendations and improving their ability to identify relevant content.
In addition to investments in AI, Pinterest has partnered with Amazon and Alphabet's Google to bring third-party advertising to its platform. Brands that use ad tech software from Amazon and Google can now reach consumers through Pinterest. Those partnerships are already boosting sales by allowing the company to tap demand beyond its ecosystem. But the partnership with Amazon, in particular, could improve the user experience in the future by simplifying the transition from browsing to shopping.
Pinterest shares recently traded at 8.2 times sales, a sensible valuation given that Wall Street analysts expect 15% annual sales growth over the next five years. But there's a chance Pinterest could grow more quickly, and shareholders could see a windfall. In either scenario, now is a good time for patient investors to buy a small position in this stock.
