The build-out of artificial intelligence (AI) has been the first big wave for AI, leading to huge surges in revenue for companies like Nvidia. However, the second wave of AI could come from the software space, as organizations begin to implement AI into their businesses.
Let's look at three stocks that could continue to benefit from a boom in AI software.
1. Palantir Technologies
Perhaps the stock investors are most excited about when it comes to AI is Palantir Technologies (PLTR +2.54%). While a number of big tech companies have been rushing to create the best AI models, Palantir has been taking a different approach. In fact, management has said it thinks AI models will eventually be pretty similar, and as such, commoditized.
NASDAQ: PLTR
Key Data Points
Instead, Palantir is aiming to become the AI operational system for organizations by focusing on the applications and workflow layers of AI. By mapping things like data sets and models to their real-world counterparts, it is looking to help customers use AI to solve real-world problems.
Palantir has been drawing in customers through its use of AI workshops, called boot camps, to show how its AI platform can address potential use cases while helping with training. This has led to a surge in both U.S. commercial customers and revenue.
The next growth driver for the company will be moving these commercial customers from proof-of-concept work into production. While the company's growth has been accelerating, this has the potential to kick it into overdrive. It should also benefit from the U.S. government, which is the company's largest customer, also beginning to embrace AI.
While the stock has a lot of potential, it is pricey, trading at this writing at a price-to-sales (P/S) multiple of 41 times 2025 analyst estimates. That is double peak software-as-service (SaaS) multiples from a few years ago for stocks with similar growth, so Palantir won't have a lot of room for error.
2. Microsoft
Microsoft (MSFT +0.60%) was one of the first large tech companies to embrace AI when it greatly increased an earlier investment it made in OpenAI and formed a partnership with the AI start-up. Early on, the company has seen the biggest benefit in its cloud computing unit Azure, which has grown rapidly as it helps customers create their own AI models and Copilots.
NASDAQ: MSFT
Key Data Points
However, the company has a big opportunity within its software business as well. GitHub, which is a platform that helps developers create code, has been one of its fastest-growing software segments since the launch of its GitHub AI Copilot that will suggest and help programmers finish coding.
The bigger opportunity, though, is with its Microsoft 365 Copilots. These AI assistants can do such things as prioritize and summarize emails and meeting notes, tell managers which tasks are completed or outstanding, share documents among workers, create PowerPoint presentations using natural language, and even let programmers use the Python programming language in Excel through only natural language prompts. Workers are still in the early days of learning and using this technology, but it can save a lot of time and creates a lot of efficiencies.
At the cost of $30 per month per enterprise user, this should be a nice revenue driver for Microsoft. The company said last quarter that 70% of the Fortune 500 have been using Copilots, but there is likely a large expansion opportunity within these customers as more departments adopt the technology.
Trading at a forward price-to-earnings (P/E) of under 33 times this fiscal year's analyst estimates, the stock appears reasonably valued.
Image source: Getty Images.
3. AppLovin
While the company may have a quirky name, AppLovin's (APP +2.34%) fortunes completely changed with the launch of its AI-powered adtech solution Axon-2. Gaming app companies use the software platform to help them attract and better monetize users. Using predictive machine learning, the platform has become a hit with customers.
NASDAQ: APP
Key Data Points
Since the launch of Axon-2 in the summer of 2023, AppLovin's software platform revenue has skyrocketed, including the segment seeing 66% revenue growth to $835 million last quarter. The company's gross margins have also been expanding nicely, including improving a whopping 820 basis points year over year to 77.5%. That's doubly good, as not only is revenue growing rapidly, but more of that revenue is flowing to the bottom line as profit.
The company thinks it can see steady 20% to 30% software platform revenue growth from gaming customers in the years ahead through self-learning and market growth. Apparently, the more the platform is used, the more it learns, and the better it becomes at targeting gamers.
The big opportunity for AppLovin, though, is expanding beyond its core gaming customers. The company has already piloted Axon-2 with e-commerce customers, and it thinks this vertical could be a meaningful contributor in 2025. If it's right, that's a big opportunity.
While its forward P/E is more than 40.5 times 2025 analyst estimates, the company's price/earnings-to-growth (PEG) ratio is only 0.65. A PEG ratio under 1 is generally view as undervalued, and growth stocks quite often have multiples well above 1.
