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The artificial intelligence (AI) race is heating up, with businesses across industries aggressively investing in AI to gain a competitive advantage, improve efficiencies, and innovate.
AI is transforming not only the technology industry but also healthcare, finance, autonomous vehicles, retail, and e-commerce, as well as defense and military operations. Aside from the major players in this race, such as Nvidia (NVDA), Microsoft (MSFT), and Amazon (AMZN), some smaller, under-the-radar companies have the potential to grow significantly as the AI era progresses.
Here are two extraordinary AI stocks that I believe investors should consider buying and holding for the long haul.
Palantir Technologies
Palantir Technologies (PLTR) is a major player in the data analytics industry, best known for its advanced software platform, AIP, or Artificial Intelligence Platform. While the government represents the majority of its clients, it also serves commercial enterprises.
Valued at $53.8 billion, Palantir’s stock is up 43% year-to-date, compared to the S&P 500 Index’s ($SPX) gain of 14.7%.
Palantir's business model is based on providing advanced software platforms that allow organizations to manage their data. Long-term contracts with clients such as government agencies, healthcare organizations, financial institutions, and other large enterprises provide revenue for the company. Palantir's revenue streams are diverse across sectors, ensuring a consistent income base.
Notably, government agencies mostly utilize Palantir Gotham for counterterrorism and defense operations, whereas commercial clients use Palantir Foundry to integrate, manage, and analyze large datasets.
In the first quarter of fiscal 2024, government segment revenue increased 16% year on year, totaling $335 million. Total revenue for the quarter increased by 21% to $634 million. While the government segment accounted for 52.8% of total revenue, the commercial segment expanded by 27% over the prior year's quarter. This implies that the number of commercial customers is increasing, demonstrating Palantir's success in diversifying its client base beyond government contracts.
Palantir has strategic partnerships with Oracle (ORCL), PwC, and CAZ Investments to help grow the commercial segment in the coming years. As a result, management expects these strategic collaborations to increase U.S. commercial revenue by 45% to $661 million in 2024. Total revenue for the year could range from $2.67 billion to $2.69 billion.
Furthermore, Palantir’s net profit of $106 million marked its sixth consecutive quarter of GAAP (generally accepted accounting principles) profit. Furthermore, management intends to report GAAP net income in the remaining quarters of 2024.
In terms of liquidity, Palantir appears to be in a strong financial position to expand its position in the AI game. It ended the quarter with $3.9 billion in cash, cash equivalents, and short-term US Treasury securities, and an adjusted free cash flow (FCF) balance of $149 million. Palantir expects to generate between $800 million and $1 billion in FCF for the full year.
Analysts that cover Palantir stock forecast revenue and earnings to increase by 21.2% and 32%, respectively, in 2024. Currently, PLTR stock is expensive, trading at 73.1x forward estimated 2024 earnings and 19.9x forward 2024 sales estimates, which is likely why many analysts rate the stock bearishly.
Overall, Wall Street has a neutral outlook for PLTR, rating it a "hold." Out of the 15 analysts covering PLTR, three rate it as a "strong buy," one suggests a "moderate buy," five rate it a "hold," one suggests a "moderate sell," and five say it is a "strong sell."
Palantir is trading north of its mean target price of $21.47. Its high target price of $35 implies the stock could rally as much as 42.5% over the next 12 months.
Palantir operates in a highly competitive environment. However, its long-standing relationships with government agencies provide a consistent and predictable revenue stream. These contracts frequently require multi-year commitments and significant barriers to entry for competitors. That said, government contracts are not without risk.
As a result, its foray into the commercial sector with Palantir Foundry has been fruitful, generating new revenue streams and reducing reliance on government contracts. While the stock's valuation is high, I believe Palantir could be a worthwhile long-term investment as demand for AI data analytics continues to rise.
Snowflake
The second extraordinary stock to buy now is Snowflake (SNOW), a cloud-based data management company. Its cloud-based data platform enables flexible, scalable, and cost-effective data management across multiple industries.
Valued at $41.7 billion, SNOW stock is down 37.6% year-to-date, compared to the tech-heavy Nasdaq Composite’s ($NASX) gain of 18%.
Snowflake's consumption-based pricing model generates recurring revenue by building long-term customer relationships. The platform's versatility allows customers to scale their usage, making it appealing to businesses of all sizes.
In the first quarter of fiscal 2025, Snowflake's total revenue increased 32.9% year-over-year to $828.7 million. Product revenue of $789.6 million accounted for a major chunk of the total, with professional services making up for the rest. Product revenue also grew 34% year-over-year.
Furthermore, its net revenue retention rate stood at 128%, with remaining performance obligations or RPO (revenue yet to be recognized), rising 46% to $5.0 billion. This robust growth reflects its rapidly expanding customer base and high customer satisfaction, leading to increased spending on Snowflake’s platform.
After a loss of $0.51 per share in Q4 of fiscal 2024, the company reported net income of $0.14 per share in Q1. Although this is an improvement, achieving consistent profitability remains a critical challenge in demonstrating that it is a viable long-term investment.
At the end of Q1, Snowflake had cash, cash equivalents, and short-term and long-term investments totaling $4.5 billion. The company also generated an adjusted FCF of $365.7 million, with FCF expected to account for 26% of total revenue in fiscal 2025. A hefty FCF balance should allow the company to continue product innovation and market expansion into new geographic regions.
In Q2, management anticipates revenue between $805 million and $810 million, representing a 26% year-over-year increase. For the full fiscal year 2025, the company expects product revenue to increase by 24% to $3.3 billion.
By comparison, analysts forecast total revenue growth of 24.1% to $3.48 billion in fiscal 2025, followed by another 23.4% increase in fiscal 2026, respectively. Furthermore, analysts predict the company will earn a profit of $0.63 per share in fiscal 2025, rising to $1.01 in fiscal 2026.
Overall, Wall Street rates SNOW stock a “moderate buy.” Of the 41 analysts that cover the stock, 26 rate it a “strong buy,” while three rate it a “moderate buy,” 10 recommend a “hold,” and two suggest a “strong sell.”
The average target price of $198.76 for SNOW indicates an upside of 60% above current levels. Plus, its Street-high estimate of $240 implies the stock can gain as much as 93.2% over the next 12 months.
At a forward P/S ratio of 12.2x, compared to its four-year historical average of 72x, Snowflake stock is a reasonable AI stock to buy now, given the rise in demand for the cloud data warehousing market.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
