Unusually high inflation and a rising-interest-rate environment have played critical roles in impacting the macroeconomy over the last couple of years. Yet despite these economic pressures, the stock market has generally shown some signs of strength.
Although the tech-heavy Nasdaq Composite cratered by 33% in 2022, the index demonstrated key resiliency last year -- surging 43%, thanks to the evolving euphoria surrounding artificial intelligence (AI). This momentum has carried over into 2024; the Nasdaq has already returned approximately 13% so far this year.
Since its inception in 1971, the Nasdaq has only produced consecutive years of negative returns on two occasions. The last time it happened was between 2000 and 2002.
Given the secular tailwinds fueling AI right now, I see further gains on the horizon for the technology sector. Below, I'll break down five stocks operating at the intersection of software and AI and assess why each is a compelling buy for long-term investors.
NASDAQ: PLTR
Key Data Points
1. Palantir
Palantir Technologies (PLTR +3.03%) is an enterprise-software platform that's used by the U.S. Military and its Western allies, as well as large corporations in the private sector. AI-powered software is an intense market dominated by big tech. Nevertheless, Palantir has done a respectable job making a name for itself.
Over the last year, the company resorted to an unorthodox lead generation strategy to market its newest product, the Palantir Artificial Intelligence Platform (AIP). Specifically, the company has been hosting immersive seminars called "boot camps" during which prospective customers can demo the company's software and identify a use case.
This approach appears to be paying off in spades. For the quarter ended March 31, Palantir grew its customer count 42% year over year. But more importantly, the company is expanding outside of its legacy government contracting business at a rapid pace. Its U.S. commercial customer count rose 69% year over year during the first quarter.
In addition to accelerating revenue, Palantir's operating margins are also expanding. This is flowing straight to the bottom line, as the company is generating positive net income and free cash flow.
Its price-to-sales (P/S) ratio of 21 isn't necessarily dirt cheap, but the chart below helps put things into perspective. Considering Palantir's current P/S is far below prior highs, now could be an interesting time to buy the dip.
PLTR P/S Ratio data by YCharts.
2. Shopify
Shopify (SHOP 3.40%) is an e-commerce platform for small and mid-size enterprises (SME), as well as large corporations.
The charts below illustrate some important financial metrics for Shopify. Overall, I'd say the company's revenue, margins, and cash flow are all trending in the right direction. However, there are a couple of important items to note.
SHOP Revenue (Quarterly) data by YCharts.
Namely, Shopify's operating performance has been inconsistent over the last few years. Much of this can be attributed to a botched acquisition of a logistics company called Flexport, as well as a series of layoffs to help reduce costs. Moreover, Shopify stock is trading at a noticeable premium when you compare it to a cohort of e-commerce peers.
SHOP P/S Ratio data by YCharts.
Shopify represents something of a turnaround story. I suspect that the company will invest aggressively in new products and services, an effort that will take a toll on short-term profits. However, these moves are a compelling strategy to build out a long-term growth narrative.
Moreover, I wouldn't discount Shopify's potential as it relates to AI and fintech more broadly. While the company's valuation may be elevated at the moment, I'd still consider scooping up some shares of Shopify to hold for the long run.
3. ServiceNow
The next company on my list is ServiceNow (NOW +3.33%), an enterprise software platform for IT management.
What makes ServiceNow unique is its ability to cross-sell. Over the last two years, ServiceNow has expanded its number of customers paying at least $1 million per year from 1,405 to 1,933. With a renewal rate of 98%, the company boasts an extremely sticky customer base.
Even better, as of March 31, ServiceNow had $17.7 billion in remaining performance obligations (RPO), representing 27% growth year over year. Not only is ServiceNow expanding existing customers and renewing at a high rate, but it's also achieving a high degree of net new business.
NOW P/S Ratio data by YCharts.
With a P/S of 16.8, ServiceNow looks undervalued, compared to many of its enterprise software-as-a-service peers.
Image source: Getty Images
4. Monday.com
Monday.com (MNDY +0.28%) builds customer relationship management (CRM) and automation tools for the workplace productivity market -- an opportunity forecast to reach $13 trillion by 2030, according to Ark Invest CEO Cathie Wood. While there are many workplace automation software tools available, Monday.com has demonstrated impressive growth.
For the first quarter ended March 31, the company increased revenue 34% year over year to $217 million. Moreover, net dollar retention was 110%, implying that the company is expanding its existing customers while also generating strong new business.
MNDY P/S Ratio data by YCharts
Similar to Shopify, Monday.com trades at a noticeable premium among its peers. The company is generating positive free cash flow, and its operating losses are nearing break-even levels. This has a lot to do with its impressive revenue acceleration -- which management believes will continue.
I think Monday.com's premium is valid and see the stock as a good buy right now.
5. CrowdStrike
CrowdStrike (CRWD +0.74%) provides cloud-based identity management and endpoint cybersecurity solutions.
Cybersecurity is an enormous market with many different use cases. Moreover, the proliferation of AI only adds to new use cases that can help fuel the cybersecurity realm in the long run. CrowdStrike's management believes its total addressable market currently sits at $100 billion. However, by 2028, management thinks the market opportunity will grow more than twofold to $225 billion.
Considering that CrowdStrike's revenue is only $3 billion, the company appears to have a greenfield opportunity in front of it. Furthermore, its top line is growing well over 30% year over year, all while operating margins expand and are helping to fuel consistent profitability.
While shares have soared 136% over the last year, the company's P/S ratio of 27.7 is well below its five-year average of 30.5. Now could be a great opportunity to scoop up some shares and enjoy the tailwinds fueling cybersecurity and AI.
