The Best Artificial Intelligence (AI) Stock to Buy, According to a Wall Street Analyst — No, It’s Not Nvidia

By | December 18, 2023

Artificial intelligence 15

Many investors are considering Nvidia (NASDAQ: NVDA) the ultimate stock in artificial intelligence (AI), as the chipmaker dominates the machine learning processor market. Other investors would go for stocks like Amazon or Microsoft as most AI workloads will likely run in the cloud.

Wedbush Securities analyst Dan Ives has a different view. He recently told CNBC Palantir Technologies (NYSE:PLTR) is “the best pure-play AI name.” He admitted that the company still has a lot to prove, but he thinks his belief will be confirmed as Palantir starts monetizing its new Artificial Intelligence Platform (AIP) product.

Most Wall Street analysts are decidedly less bullish. In fact, Palantir currently has more sell recommendations than buy recommendations, and its 12-month average price target of $18 per share implies only 2% upside from the current price.

Is this stock worth buying?

Palantir is a data analytics company

Palantir helps customers turn chaotic data into smart decisions. The two primary platforms integrate data and machine learning (ML) models into an ontology (a fancy word for digital information, linked to its physical counterparts). For example, a product can be linked to the factory that made it, the carrier that shipped it, and the consumer who purchased it.

The ontology surfaces this data through user-centric analytics tools and AI applications, providing decision makers with actionable insights that lead to better outcomes. Additionally, the platform records these decisions to create a feedback loop that supports AI/ML model optimization, a process known as ModelOps.

Palantir is a leader among AI/ML platform providers

Several analysts have praised Palantir over the past year. Forrester research called the company a leader in AI/ML platforms and noted that Palantir has a stronger product than any competitor. Similarly, Dresner Advisory Services recognized its leadership in ModelOps, AI/ML and data science. These recognitions are an important signal to potential customers.

Palantir is leveraging its strength in AI/ML with its recently launched AIP product. AIP integrates with its existing platforms for government and commercial customers to add support for major language models. By doing this, AIP lets users integrate generative AI capabilities into their ontologies to automate various workflows.

Palantir has also refocused its go-to-market strategy around AIP bootcamps, five-day events in which customers learn how to build and deploy AI solutions using real data from their businesses. That’s a notable acceleration from previous pilot programs that lasted one to three months, and the shift in go-to-market strategy appears to be paying off.

Chief Revenue Officer Ryan Taylor had this to say about bootcamps during the last earnings call: “Early indications point to dramatic improvements in our unit economics, from first contact to customer conversion, while accelerating new customer negotiations. Bootcamps also drive contract extensions.”

Palantir made progress in the third quarter

Palantir reported solid results in the third quarter. Commercial revenues increased 23% and government revenues increased 12%, for total revenues up 17% to $558 million. This sequential acceleration (of 13% growth) reflects the increasing demand for AIP among commercial customers.

Government revenues declined during the quarter, but management expects a new acceleration going forward as these customers adopt AIP. “The potential market for AIP and the trajectory of potential AIP growth for our company is enormous,” said Taylor.

In terms of operating income, Palantir achieved its fourth consecutive quarter of generally accepted accounting principles (GAAP) profitability. Net income improved to about $72 million, compared to a loss of $124 million last year. Cost control efforts and improved go-to-market efficiency were the driving forces behind that profitability.

The only statistic in question is the number of customers. Although Palantir grew its customer base by 34% in the third quarter, revenues are still quite concentrated as the company only has 453 customers. Investors should keep an eye on this metric in the coming quarters.

Palantir stock is trading at a reasonable valuation

In summary, Palantir is a recognized leader in AI/ML platforms and ModelOps, and AIP could strengthen its strong presence in those markets. The company has a relatively small number of customers, meaning its revenue is highly concentrated, but AIP could attract more customers to Palantir in the future.

The big data software market is expected to grow 12% annually through 2027, while the market for ML platforms is expected to grow 35% annually through 2032. Palantir should land somewhere in the middle. For example, Morgan Stanley Analysts expect the company to achieve annual revenue growth of 20% through 2029.

In that context, the current valuation of 19 times sales seems somewhat reasonable, but certainly not cheap. Investors who can tolerate volatility should consider buying a position in this growth stock today.

Should You Invest $1,000 in Palantir Technologies Now?

Consider the following before purchasing shares in Palantir Technologies:

The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Palantir Technologies wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor service has more than tripled the return of the S&P 500 since 2002*.

View the 10 stocks

*Stock Advisor returns December 11, 2023

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon, Nvidia and Palantir Technologies. The Motley Fool holds positions in and recommends Amazon, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.

The Best Artificial Intelligence (AI) Stock to Buy, According to a Wall Street Analyst — No, It’s Not Nvidia Originally published by The Motley Fool

Leave a Reply

Your email address will not be published. Required fields are marked *