Artificial intelligence (AI) has turned out to be an incredible catalyst for many companies over the past year or so, and many names that are capitalizing on the growing adoption of this technology have witnessed a rapid rise in their share prices.
For instance, an investment of $10,000 in Nvidia at the beginning of 2023 is now worth almost $58,000. That's not surprising as this company has been a pioneer in the field of AI thanks to its graphics cards, which allow users to train large language models (LLMs) and deploy AI applications. A similar investment in Super Micro Computer stock at the beginning of last year is now worth $110,000 as the company's AI servers have been in hot demand.
The good part is that AI adoption is still in its early phases. Buying solid AI stocks as a part of a diversified portfolio could allow investors to profit from this secular growth trend.
Palantir Technologies (PLTR 1.38%) and ASML Holding (ASML -1.00%) are two such stocks that investors can consider buying right now to make the most of the proliferation of AI.
1. Palantir Technologies
Palantir Technologies is turning out to be a solid play on the booming demand for AI software. The company's Artificial Intelligence Platform (AIP) is witnessing robust adoption, and management said it's helping the company "significantly compress sales cycles and accelerate the rate of new customer acquisition." That's not surprising as AIP gives organizations the ability to integrate large language models into their operations through bootcamps, which Palantir hosts to help clients understand the use cases of AI and how this technology can be used to make their businesses better.
AIP has led to a sharp jump in the number of commercial deals the company has been signing. Management pointed out on the February earnings call, "The demand is off the charts for AIP, with boot camps as the delivery mechanism for AIP, and we're seeing AIP drive the expanding addressable market."
The strength of Palantir in the AI software market is a key reason why analysts expect the company's revenue to increase 22% in 2024 to $2.71 billion -- an improvement from the 17% growth reported for 2023. More importantly, Palantir's AI business is in the early phases of growth as the market for AI software platforms is expected to clock annual growth of 31% through 2030, generating revenue of $279 billion by the end of this decade.
Palantir's growth rate is likely to accelerate if it manages to maintain its impressive deal momentum. For instance, the number of $1 million-plus deals it struck in the fourth quarter of 2023 nearly doubled on a year-over-year basis to 103.
The company's remaining performance obligations (RPO), the value of future contracts Palantir expects to fulfill in the future, also jumped 28% year over year to $1.24 billion. With RPO growth outpacing the top line, the company is well-positioned with a healthy revenue pipeline.
And now, the company has partnered with Oracle to distribute its AI software platform across a wider network, which should help it land more customers. These promising developments explain why analysts are forecasting 85% annual earnings growth for the company over the next five years.
This improved earnings power is likely to fuel even more gains for Palantir shareholders, making it a top choice for investors looking to add an AI growth stock to their portfolio.
2. ASML Holding
Semiconductors are playing a critical role in driving the AI revolution, which is evident from the huge demand for Nvidia's chips. However, manufacturing those chips wouldn't have been possible without machines from ASML Holding.
For example, Nvidia's flagship H100 processor, which sells like hotcakes, is manufactured using a custom 5-nanometer (nm) node from Taiwan Semiconductor Manufacturing, popularly known as TSMC. For manufacturing chips based on this process node, TSMC utilizes ASML's extreme ultraviolet (EUV) lithography systems.
The good news for ASML is the demand for advanced process nodes is increasing thanks to AI. Nvidia, for instance, is rapidly increasing the output of its AI chips to meet customer demand. To make that happen, foundries such as TSMC are reportedly boosting their capital investments. On its previous earnings call, TSMC management pointed out that "between 70% and 80% of the capital budget will be allocated for the advanced process technologies" out of its total capital expenditure budget of $28 billion to $32 billion for 2024.
Moreover, with the likes of Nvidia and Apple set to move to more advanced chips manufactured using 3nm and 2nm process nodes, the capital expenditure on procuring EUV machines should ideally increase. This is the reason why the orders for ASML's machines shot up significantly in the fourth quarter of 2023.
The Dutch company saw its net bookings spike to 9.2 billion euros in Q4 2023 from 2.6 billion euros in the preceding quarter. Its order backlog stood at a solid 39 billion euros. ASML's order book is likely to become larger as the market for AI chips is expected to grow at an annual rate of 38% through 2032, further driving the demand for advanced chipmaking equipment.
TSMC, for instance, is set to build a third plant in the U.S. to manufacture 2nm chips, which also means it will be placing orders for ASML's EUV lithography equipment as the latter holds a monopoly-like position in this market. In all, the secular growth of the AI chip market and ASML's hold over EUV lithography are the reasons why this company seems set for robust growth going forward.
It's worth noting shares of the company have jumped nearly tenfold in the past decade, and the lucrative semiconductor opportunity that lies ahead signals that ASML stock could turn out to be a major winner in the long run.
