Semiconductor stocks Nvidia and Broadcom have been popular with investors as the artificial intelligence spending boom has unfolded, but there are other ways to play the trend.
In the third quarter, several hedge fund billionaires bought shares of Palantir Technologies (PLTR +1.45%), a software stock that has advanced 2,000% since January 2023. That list includes Ken Griffin and Cliff Asness, both of whom outperformed the S&P 500 over the past three years.
Meanwhile, several hedge fund billionaires bought shares of Comfort System (FIX 1.60%), a construction services stock that has added 970% since January 2023. That list includes Israel Englander and Steven Cohen, both of whom outperformed the S&P 500 over the past three years.
Here's what investors should know about these AI stocks.
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1. Palantir Technologies
Palantir develops analytics platforms that help commercial organizations and government agencies manage and make sense of complex information. Its software revolves around a decision-making framework called an ontology, which differentiates it from many other analytics products, as most are focused on reporting and visualization.
Importantly, the ontology generates increasingly valuable insights over time as the underlying machine learning models capture more data. Palantir enhances its analytics tools with an artificial intelligence (AI) platform called AIP, which supports the development of AI agents and lets users engage data with natural language.
Palantir reported stunning fourth-quarter financial results, beating estimates on the top and bottom lines. Revenue increased 70% to $1.4 billion, the tenth straight acceleration, and non-GAAP net income soared 79% to $0.25 per diluted share. Particularly impressive, the company achieved an unprecedented Rule of 40 score of 127%.
However, Palantir trades at an expensive 214 times earnings. Wall Street expects earnings to increase at 45% annually over the next three years, but even if the company meets that lofty estimate, the current valuation is hard to justify. I think investors can own a very small position today, so long as they understand the stock could easily drop 50% in the future.
NASDAQ: PLTR
Key Data Points
2. Comfort Systems
Comfort Systems breaks its business into two operating units: mechanical services and electrical services. The company designs, installs, renovates, and performs maintenance on HVAC (heating, ventilation, and air conditioning), electrical, and plumbing systems in new and existing commercial, industrial, and institutional buildings.
Comfort Systems services customers in a broad range of industries, including healthcare, manufacturing, and technology. The company benefits from extensive scale (more than 50 subsidiaries across 184 locations), and its ability to construct mechanical and electrical systems as modular components at off-site facilities is a key advantage because it saves time and money versus on-site construction.
Comfort Systems supplies air conditioning and specialized immersion cooling systems for data centers, which is important because AI infrastructure generates a tremendous amount of heat. The company also provides mechanical and electrical services to semiconductor manufacturers, such as cleanroom ventilation systems. Technology customers accounted for 42% of revenue in the last quarter, up from 32% last year.
Comfort Systems reported strong financial results in the third quarter. Revenue increased 35% to $2.4 billion, operating margin expanded 3 percentage points, and GAAP net income increased 101% to $8.25 per diluted share. Meanwhile, revenue backlog (i.e., revenue not yet recognized under contracted or committed projects) increased 66%, hinting at strong future sales growth.
Comfort Systems stock currently trades at 52 times earnings. While not traditionally cheap, that valuation multiple is reasonable for a company whose earnings are forecast to grow at 39% annually over the next three years. Investors should consider buying a position today.
