Artificial intelligence (AI) has gone viral since early last year, and it's easy to see why. This next-generation software can create original content, including text, video, and images, from just a few prompts. The technology also promises to revolutionize business by streamlining processes and increasing productivity.
As the primary maker of the high-end graphics processing units (GPUs) that provide the computing power that underpins this groundbreaking technology, Nvidia (NVDA 1.75%) has been one of the earliest beneficiaries of the accelerating adoption of generative AI. The company's revenue has grown by more than 100% year over year for three successive quarters, and another quarter of similar growth is on the way.
However, investors are beginning to look beyond hardware to the wave of AI software adoption to follow, and with good reason. According to a forecast by Bloomberg Intelligence, generative AI software sales are expected to surge to $318 billion by 2032, up 6,260% from just $5 billion last year.
While Nvidia will undoubtedly continue to prosper, another company is also well positioned to benefit from the AI software revolution.
Image source: Getty Images.
The godfather of AI software
Palantir Technologies (PLTR 1.29%) first rose to prominence by providing the U.S. government and its allies with AI software to help ferret out terrorists before they could strike. More recently, however, the company has focused its AI expertise and data analytics prowess on helping businesses make data-driven decisions that lead to more successful outcomes.
Because it had decades of experience in the field, Palantir was able to quickly develop generative AI solutions when the technology evolved. The fruit of that labor is its Artificial Intelligence Platform (AIP).
Many businesses would love to integrate AI into their operations, but simply don't know how. Palantir is solving that problem by holding AIP "bootcamps." The company describes these as "immersive, hands-on-keyboard sessions [that] allow new and existing customers to build live alongside Palantir engineers, all working toward the common goal of deploying AI in operations." This helps businesses "go from zero to use case in just one to five days." Palantir goes on to note, "We have a growing backlog of AIP Bootcamps due to the overwhelming demand."
In October, the company set a goal of hosting 500 AIP bootcamps over the coming year, but demand has been off the charts. In the first quarter alone, the company conducted 660 bootcamps, and the backlog continued to grow. Management cited two instances when companies signed seven-figure deals just days after completing a bootcamp. The company had previously noted that these bootcamps "significantly compress sales cycles and accelerate the rate of new customer acquisition."
This shows that Palantir's bootcamp strategy is a winning one.
Show me the money
The results are only just beginning to show up in the company's finances. In the first quarter, revenue grew 21% year over year to $634 million, and Palantir has its sixth consecutive quarter of profitability -- but that only tells part of the story. U.S. commercial revenue, which includes AIP, grew 40% year over year while customers for the segment grew 69%. Remaining deal revenue -- the remaining value of contracts not yet booked into revenue -- grew by 74%, which suggests its growth spurt will continue.
As a result, management increased its full-year forecast -- it's now calling for revenue of $2.68 billion, or growth of roughly 20% at the midpoint of its guidance. Due to the strong and ongoing demand, management now expects full-year U.S. commercial revenue of at least $661 million, up 45%. Based on the robust demand, there could be much more to come.
A word on valuation
Despite its accelerating growth and the massive opportunity ahead for the company, Palantir stock won't appeal to every investor. It trades at 179 times earnings and 21 times sales -- valuations that might raise eyebrows. However, those metrics fail to take into account the company's accelerating growth. Its forward price/earnings-to-growth (PEG) ratio clocks in at less than 1, the standard for an undervalued stock.
The adoption of generative AI has only just begun, and Palantir has decades of AI experience to bring to bear on the coming competition. Its strategy for bringing AI to the masses is absolutely brilliant and should continue to pay dividends from here. That's why Palantir stock is a buy.
