Technology stocks have made waves over the past two years, leading the strong gains that the stock markets have posted. But behind that hype, a pattern has emerged.
Some of the biggest market winners in recent months have been the chip makers behind AI stocks, the big semiconductor companies that design and produce the high-end processor chips that are required to support the expansion of AI development and applications. Those chip companies have thrived as their customers – including the software firms creating AI – build up their own inventory in preparation for the next wave of development.
There are signs that the tech industry is ready for a shift, and that AI software companies – that is, those firms that are building the AI apps – will be the next shiny thing to attract investors’ attention. The software companies have the inventory they need – and with AI technology maturing, their time is here. So, expect the AI software companies to boom over the course of the coming year, as they start putting those stockpiled chips to work.
That’s the theory behind Steven Fiorillo’s upbeat take on Palantir (NASDAQ:PLTR) and Meta (NASDAQ:META). The investor, rated by TipRanks among the top 4% of his peers, has looked under the hood at both of these shares, and picks them as potential winners, among the best AI stocks to buy in the year ahead. Here are the details.
Palantir Technologies (PLTR)
First up is a name that’s well-known in tech circles as an innovator in data analytics. Palantir started as a brainwave from the billionaire venture capitalist and tech promoter Peter Thiel, who founded the company in 2003 to marry data analysis with human insight for the best results. That vision has found fruition with the explosion of AI tech, building on the best of both AI and human factors. The company, whose name comes from Tolkien, and connotes the ability to discern faraway events in real time, uses AI-powered applications to enhance its basic data analysis.
Palantir has built on this foundational theory, and put AI at the center of its activities, using the new tech as a way to augment human intelligence. The company’s customers can access a variety of AI-powered platforms, including the company’s flagship artificial intelligence platform, the AIP, and can tap into them to realize the benefits of natural language processing applied to complex human interactions. The company’s products – the tools and applications – are designed to operate without the use of complex computing codes or purpose-written scripts, and not to require sophisticated computer application knowledge of the user. Rather, users can interact with the software tools through ordinary language, and will receive detailed, even nuanced, answers in response to queries. In short, Palantir wants to make high-end, complex data analysis available to non-experts.
Over the past couple of years, the boom and expansion of AI, especially generative AI, has pushed the technology into more and more applications – and put a premium on Palantir’s services. The company has benefited from that high demand, and among its recent customers can count a new contract with the US Defense Department. This contract is worth an initial $153 million, and contains potential additional awards up to $480 million over the next five years. The contract win highlights how Palantir has applied its AIP to both Defense and Business customers.
At the beginning of May, Palantir reported its 1Q24 results, and showed some impressive gains. Revenue was up almost 21% year-over-year, to $634 million, and beat expectations by well over $16 million. The company’s non-GAAP EPS came to 8 cents, which met the forecasts. The solid revenue number was powered by a 42% year-over-year increase in the company’s customer count. Even better, for investors, Palantir’s 1Q24 result marked six quarters in a row of profits by GAAP measures.
However, despite Palantir’s solid performance, its stock has plummeted 13% since the earnings report release. For Fiorillo, this drop presents investors with a unique buying opportunity.
“I believe the retracement in shares of PLTR after earnings is a golden opportunity for long-term investors. We’re in the early stages of A.I., and with the amount of capital being deployed, it’s going to be hard to stop it from becoming the next big technological boom, just as cloud computing and Software as a Service (SaaS). PLTR raised guidance and is seeing explosive growth in its customer base. With the net dollar retention level at 111%, the future potential from the 40% YoY increase in commercial revenue and 69% YoY growth in U.S. commercial customers could be immense,” Fiorillo opined.
At his bottom line, the 5-star investor says, “I am more bullish than ever on PLTR, and while there may be risks to the investment thesis, I believe PLTR will become the 2nd most important software company behind MSFT in the next decade.”
Unsurprisingly, then, Fiorillo rates PLTR shares a Strong Buy. (To watch Fiorillo’s track record, click here)
That is a more upbeat take than the general view on Wall Street. The stock only claims a Hold consensus rating, based on a mix of 7 Holds, 2 Buys and 3 Sells. The Street expects shares to remain range-bound for the foreseeable future as indicated by the $22.11 average price target. (See PLTR stock forecast)
Meta Platforms (META)
Next up is a name we all know, Meta Platforms. This company got its start as Facebook, Mark Zuckerberg’s flagship social media company, but has since branched out to include ownership of Messenger, Instagram, and WhatsApp as well. Meta is a global leader in the social media niche, and its total reach, a vital metric in the industry, encompasses well over 3 billion people. The company complements that enormous reach with an equally impressive market cap; the firm is valued at $1.21 trillion, making it one of just six trillion-dollar-plus companies traded on Wall Street.
Meta’s core business is social media, and that forms the base of the company’s lucrative digital advertising revenue makers. As noted, this all depends on reach – and in the last set of company results, covering 1Q24, the company reported a DAP, or family daily active people, of 3.24 billion for the month of March this year. That marked a 7% increase year-over-year – and also showed that Meta, across all of its platforms, can reach out to almost 41% of the world’s population.
To keep itself relevant, Meta is developing AI technology to apply to the metaverse and its social media platforms. The company has a research lab, Meta AI, and is working on a variety of AI applications, including a generative AI user interface, a creative AI, and a connection AI. Meta is working to make these AI systems scalable, for application at any level the user wants, and to create a seamless transition into the AI universe.
That’s a tall order, but Meta has the resources to back it. The company generated $36.46 billion at the top line in 1Q24, a total that was $240 million better than had been anticipated – and was up over 27% year-over-year. At the bottom line, earnings came in at $4.71 per share, and beat the forecast by 39 cents.
For Fiorillo, the key here is Meta’s moves into AI. He sees the company’s combination of existing engineering skill and data experience as a major advantage.
“META is shifting its resources from the Metaverse to A.I., and it’s an important move. This gives META a seat at the table, and they will be one of the driving forces behind A.I. rather than being dependent on Alphabet or Microsoft… We don’t know the extent of what A.I. will become in the future, but it’s hard to deny that it will be a driving technological force. The combination of META’s capital allocation, engineering proficiency, and underlying data makes them a front-runner in the A.I. space. Unfortunately for start-ups, and other businesses, the A.I. race could be controlled by a few companies, and with META shifting gears, it’s hard to see them not being one of the winners that takes most,” Fiorillo opined.
These comments support the top investor’s Strong Buy recommendation on META shares.
And he’s not the only one. The Street gives META stock a Strong Buy consensus rating, based on no fewer than 42 analyst reviews that include 37 Buys, 3 Holds, and 2 Sells. The stock’s average target price of $522.95 implies a gain of ~10% on the one-year horizon. (See Meta stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured investor. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
