One of the biggest themes that helped drive the market last year was artificial intelligence (AI). This technology, once relegated to science fiction, has suddenly become commonplace. Meanwhile, companies have been racing to become AI leaders, seeing it as a generational opportunity.
Let’s look at three stocks that are benefiting greatly from AI.
Known as one of the largest suppliers to the US government, Palantir Technologies(NASDAQ: PLTR) and its data collection and analysis solutions have been used for such critical tasks as fighting terrorism and tracking COVID-19 cases. However, the company has now been able to incorporate AI into its solutions to begin helping business customers address their own mission-critical needs.
While many large technology companies have focused on developing the best AI models, Palantir has decided to focus on the applications and workflow layers of AI software to improve logic and functionality. This helps AI perform actions better in real-life applications. Its AI platform is designed to be the operational layer of an organization, where digital assets, such as data sets and models, are then connected to their real-world counterparts, such as products or customer orders.
The company’s solutions have seen strong demand from commercial customers: its US commercial revenue increased 54% last quarter to $179 million, while its number of US commercial customers increased 54% last quarter to $179 million. it shot up 77%. Meanwhile, the US government, its largest customer, is also beginning to adopt artificial intelligence solutions.
So far, much of Palantir’s early success in AI has come in proof-of-concept prototype work. It has done a great job of acquiring business clients through its Artificial Intelligence Platform (AIP) boot camps, where it demonstrates to clients how its technology can be applied to potential use cases while also providing onboarding and training. The big opportunity ahead is to take these customers from proof of concept to production. This should help accelerate the company’s overall revenue growth, which was 30% last quarter.
The only knock for Palantir is valuation, with shares currently trading at 42 times forward price-to-sales ratio.
Image source: Getty Images.
Another company that has benefited greatly from AI is AppLovin(NASDAQ: APP). The company has a portfolio of apps, but its core business is an advertising technology solution that helps gaming apps better engage and monetize customers.
Since launching its AI-powered Axon 2 solution in early 2023, the company’s revenue has skyrocketed as gaming apps have adopted its technology. Existing customers have started spending more and this has also attracted many new customers. Axon 2 uses predictive machine learning to target ads to users most likely to download those apps.
Axon 2’s success can be seen in AppLovin’s software platform revenue, which increased 66% to $835 million last quarter. Even more impressive is that this revenue growth was on top of the 65% growth in software platform revenue seen a year ago in Q3 2023.
The company’s solution appears to be taking business away from drive softwarewhose comparative “grow solutions” segment saw a 5% decline in revenue last quarter. The success of Axon 2 is also leading to a big improvement in the company’s gross margin, which increased from 69.3% a year ago to 77.5%. This, in turn, is leading to even greater profitability growth.
AppLovin has said it expects revenue growth from gaming clients to be in the 20% to 30% range over the long term, but its biggest opportunity is to take its ad tech platform beyond gaming. The company has been testing Axon 2 with e-commerce businesses with initial success and expects this new vertical to become a significant contributor in 2025.
The stock is currently trading on a forward price-to-earnings (P/E) ratio of 39.5 based on analyst estimates for 2025 with a price-to-earnings-to-growth (PEG) ratio of 0.63. A PEG ratio less than 1 is considered undervalued, and growth stocks typically have multiples well above 1.
semiconductor manufacturer Broadcom(NASDAQ:AVGO) has begun to make waves in the AI chip market, where the company is working with clients to design custom AI chips for things like AI training and inference. Alphabet was its first major customer in this space with its Tensor Processing Units (TPUs), which it has credited as a key differentiator that helps reduce inference processing times and reduce costs.
Broadcom’s custom chips are designed for very specific tasks, and as such, they perform better at those tasks than graphics processing units (GPUs), which offer more flexibility. For example, Alphabet’s TPUs are optimized for tensor operations within Google’s cloud TensorFlow framework. Tensor operations are a form of high-level mathematics used in AI deep learning.
The company has seen strong growth thanks to its custom AI chips, which surpassed $12 billion in revenue in fiscal 2024. Meanwhile, the company has been steadily adding new customers.
Last quarter, the company said its three big custom AI chip customers, believed to be Alphabet, Metaplatformsand ByteDance, each planned to deploy 1 million AI chip clusters by 2027, which would equate to an addressable market of between $60 billion and $90 billion in fiscal 2027 alone. Meanwhile, he said that two additional clients, believed to be OpenAI and Apple — were advancing the development of their chips, which could increase this number even further.
If the market for custom AI chips continues to take off, Broadcom appears poised to be the biggest winner. The stock is currently trading at a Forward P/E of 36.5 based on analyst estimates for this fiscal year (ending November 2025), which isn’t expensive if you can take advantage of its AI chip opportunity.
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Alphabet executive Suzanne Frey is a member of The Motley Fool’s board of directors. Geoffrey Seiler has positions at Alphabet. The Motley Fool ranks and recommends Alphabet, AppLovin, Apple, Meta Platforms, Palantir Technologies, and Unity Software. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Top 3 Artificial Intelligence (AI) Stocks Ready for a Bull Run was originally published by The Motley Fool
