New technologies are exciting, but investors chasing the next big trend can get burned. Artificial intelligence (AI) might be the hottest thing on Wall Street in some time. Hype over its potential has played a significant role in driving the stock prices of many companies connected to the industry higher since last year -- among them, SoundHound AI, an AI company focused on audio technology.
I'm not saying that SoundHound AI won't succeed over the long term, but it's carrying a $1 billion market cap and did less than $50 million in revenue last year. Perhaps investors should look for AI companies that are more mature, with higher floors and enough potential to deliver outstanding returns -- companies, for example, like Palantir Technologies (PLTR +2.94%), Nvidia (NVDA 2.94%), and UiPath (PATH +2.81%).
1. Palantir's customer acquisition momentum is picking up steam
AI may be a hot buzzword, but it's not an out-of-the-box technology. To make use of it, companies have to develop, train, and implement specific applications. That's where Palantir Technologies has a tremendous opportunity. The software company enables customers to build and deploy custom software applications, including AI, into their businesses via its Gotham, Foundry, and AIP platforms.
NASDAQ: PLTR
Key Data Points
Palantir has a long history as a U.S. government contractor -- Washington was its primary customer in its early years. Today, Palantir maintains strong government ties, but has been expanding rapidly into the private sector. The company's commercial customer base is growing at an accelerated pace. Palantir ended 2023 with 221 U.S. commercial accounts, a 55% year-over-year increase. Its customer count had grown 34% year-over-year in the third quarter.
The long-term opportunity here is tremendous. Palantir's ability to win large government contracts, including a recent $178 million U.S. Army project, underlines the value its tech can add to an organization. In the private sector, there are more than 350,000 companies with at least 250 employees (large businesses) worldwide, enough potential prospects to feed its growth for years.
2. Nvidia is giving long-term investors an entry point
Graphics processing unit (GPU) maker Nvidia is arguably one of the fundamental AI stocks. The company has exploded in value over the past few years due to its dominance in the AI chip market. Nvidia's GPUs can handle the hefty computing workloads involved in training and operating AI models. Its dominant position in providing that hardware is reflected in its results: In Q4, its data center revenue grew by 409% year over year.
NASDAQ: NVDA
Key Data Points
Lisa Su, CEO of its archrival, AMD, predicts the AI chip market will grow to $400 billion by 2027. Nvidia's full-year run-rate for data center revenue (based on its Q4 result) is $72 billion, so it should have large opportunities ahead as the market expands, even if competitors chip away at in its estimated 90% market share in AI silicon. Of course, optimists could also argue: What if those competitors don't make a significant dent in Nvidia's stranglehold on the AI chip market?
The broader stock market has gotten a bit shaky recently, and Nvidia has fallen by 20% from its peak. Shares now look relatively attractive at a forward P/E ratio of 32, considering that, on average, analysts believe its earnings could grow by more than 30% annually for the next three to five years. Investors shouldn't jump in too hard, but nibbling on Nvidia as it dips seems like a sound long-term bet for investment gains.
3. UiPath is a sneakily good automation stock
When people think of AI systems replacing humans, visions of Hollywood movie robots may spring to mind. UiPath's business actually is in that ballpark, but its software does all the heavy lifting. It specializes in robotic process automation (RPA) software, which learns how to perform repetitive tasks like filling out or filing forms or sorting data. This software can replace human effort for mundane but necessary tasks, freeing up people to handle work that requires more creativity and flexibility.
NYSE: PATH
Key Data Points
According to third-party rankings such as Gartner's Magic Quadrant, UiPath is the leader in RPA software. One telltale sign of a great business is when customers use more of its products or services over time. The company's 119% net revenue retention rate shows that its established customers are increasing their spending with it. That's easy growth for the company to benefit from that doesn't require it to add new clients. But UiPath is adding new customers, so its revenue grew by 24% in 2023.
UiPath is profitable, and its revenue growth should trickle down to the bottom line. On average, analysts believe UiPath will grow earnings by more than 22% annually for the next three to five years. That's a solid growth rate for a business trading at 33 times its 2024 earnings estimates. If you believe that AI and automation will continue to play a bigger role in the global workforce, it's hard not to feel optimistic about the outlook for UiPath.
