Three Stocks That Could Soar with the Next AI Software Wave
Introduction: The rise of artificial intelligence (AI) has already transformed companies like Nvidia. Now, the software sector is poised for its own surge as AI becomes integrated into more business practices. Here, we explore three stocks positioned to benefit from this shift.
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1. Palantir Technologies (NASDAQ: PLTR)
Palantir Technologies is a stock generating buzz among investors interested in AI. Rather than racing to develop proprietary AI models like many tech giants, Palantir focuses on creating an operational AI system for organizations. The company believes that AI models will eventually become commoditized.
Palantir aims to connect data sets and models with real-world applications, helping clients leverage AI to tackle practical challenges. To attract customers, Palantir hosts AI workshops, referred to as boot camps, demonstrating how its platform can be applied in various scenarios. This has boosted its revenue and increased the number of commercial clients.
The company’s future growth depends on transitioning these clients from initial proof-of-concept projects to robust production implementations. Additionally, Palantir’s largest customer, the U.S. government, is also starting to use AI, which could contribute to further growth.
However, investors should note that the stock trades at a high price-to-sales (P/S) ratio of 41 times projected 2025 revenues, which is twice the valuation of similar growth stocks from earlier years.
2. Microsoft (NASDAQ: MSFT)
Microsoft has been a leader in adopting AI, significantly increasing its investment in OpenAI and forming a strategic alliance. Its cloud computing segment, Azure, has particularly benefited, as it supports clients in developing their own AI models and Copilots.
Microsoft’s software division also stands to gain, especially with GitHub, which assists developers in coding. The introduction of the GitHub AI Copilot has been a major success.
Furthermore, Microsoft 365 Copilots can manage tasks like summarizing emails, organizing meetings, and even generating PowerPoint presentations using natural language. While employees are still adapting to this technology, it promises significant efficiency benefits.
At $30 per month for enterprise users, this service could drive considerable revenue. Microsoft reported that 70% of the Fortune 500 companies have adopted Copilots, indicating room for expansion as more departments begin to integrate the technology.
Trading at a forward price-to-earnings (P/E) ratio of under 33 times this fiscal year’s estimates, Microsoft’s valuation seems reasonable.
Image source: Getty Images.
3. AppLovin (NASDAQ: APP)
AppLovin dramatically changed its prospects with the launch of its AI-enhanced ad-tech solution, Axon-2. This platform assists gaming app companies in attracting and monetizing users more effectively. Its predictive machine learning capabilities have made it popular among clients.
Since introducing Axon-2 in summer 2023, AppLovin has seen its software revenue skyrocket, with a 66% increase to $835 million in the last quarter. Its gross margins have improved significantly, rising 820 basis points year-over-year to 77.5%. This indicates that not only is the company’s revenue growing, but it is also becoming more profitable.
AppLovin anticipates continued revenue growth between 20% and 30% from gaming clients, as the platform learns and becomes more effective at targeting users.
The company also sees potential in branching out beyond gaming. Axon-2 has been piloted with e-commerce clients, which could contribute to substantial growth by 2025 if successful.
Despite a forward P/E above 40.5 times 2025 estimates, AppLovin’s price/earnings-to-growth (PEG) ratio stands at 0.65, indicating it may be undervalued, as a PEG under 1 usually suggests growth potential.
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Geoffrey Seiler holds no positions in the mentioned stocks. The Motley Fool recommends AppLovin, Microsoft, Nvidia, and Palantir Technologies, and has various positions in these companies. The Motley Fool recommends specific options on Microsoft and has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.
