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The artificial intelligence (AI) market is advancing quickly, with breakthroughs in machine learning and data analytics. As businesses integrate AI to improve efficiency, cut costs, and improve customer experiences, demand for AI solutions is rising. As a result, investors see AI stocks as a profitable long-term investment opportunity.
Here are two tech companies experiencing explosive growth by harnessing the power of AI. Despite their strong fundamentals, the recent market sell-off caused by recession fears dragged down shares of both Meta Platforms (META) and Palantir Technologies (PLTR). Nonetheless, both stocks have risen dramatically this year, and may continue to do so in the future.
The Bull Case For Meta Platforms
Meta Platforms (META), formerly known as Facebook, has been a major player in the technology industry for more than a decade. It is part of the “Magnificent Seven” group of seven leading tech giants that influence the overall stock market. The company owns several social media platforms, including Facebook, Instagram, WhatsApp, and more.
META stock remains a compelling investment, thanks to its strong social media presence and bold vision for the future. Meta recently reported another strong quarter, beating consensus revenue and earnings estimates, and propelling the stock higher.
Valued at $1.2 trillion, Meta’s stock has skyrocketed 41.8% year-to-date, outperforming the tech-heavy Nasdaq Composite’s ($NASX) gain of 9%.
During the Q2 earnings call, CEO Mark Zuckerberg stated that over 3.2 billion people use at least one of Meta's platform apps every day. This includes all of the social media apps in its Family of Apps (FoA) segment, which increased revenue by 22% in the second quarter.
The segment's operating income increased by 47.2%, reaching $19.3 billion. According to management, revenue for the FoA segment was driven by growth in the WhatsApp Business Platform. In the U.S. alone, WhatsApp now has over 100 million monthly active users.
The Reality Labs (RL) division, which includes its augmented reality (AR) and virtual reality (VR) technologies, has shown signs of recovery in recent quarters. Its revenue increased by 27.9% in the second quarter, thanks to higher sales of AI-powered Quest headsets. However, it posted an operating loss of $4.4 billion.
Total revenue rose 22% year on year to $39 billion, while diluted earnings per share (EPS) soared 73% to $5.16.
Going forward, management intends to expand the Threads app, which currently has 200 million monthly active users. Furthermore, Meta believes AI is shaping their metaverse work, and that the company's investments in RL will pay off in the long run.
For 2024, analysts foresee Meta’s revenue and earnings increasing by 19.7% and 42.1%, respectively. Revenue and earnings are expected to increase by 13.5% and 13.8%, respectively, in 2025. Trading at 23 times forward 2024 earnings, Meta is a reasonable AI stock to buy now.
What Does Wall Street Say About Meta Stock?
Overall, Wall Street rates META as a "strong buy.” Of the 45 analysts who cover META, 39 recommend it as a "strong buy," one as a "moderate buy," three as a "hold," and two rate it a “strong sell.”
Analysts have set a mean price target for Meta stock of $570.38, which is 15.4% higher than current levels. Its high target price of $647 indicates an upside of 30.9% over the next 12 months.
The Bull Case For Palantir Technologies
Palantir Technologies (PLTR) is a major player in the data analytics industry. The company is well-known for its powerful AI software platforms, Gotham and Foundry, which allow organizations to analyze complex data sets and derive actionable insights.
Valued at $59.2 billion, Palantir’s stock has soared 57.3% year-to-date, outpacing the S&P 500 Index’s ($SPX) gain of 9.8%.
Palantir AIP, or Artificial Intelligence Platform, has a strong presence in the government sector, ensuring a steady revenue stream. In the most recent second quarter, the government sector generated 54.7% of total revenue of $678 million. Government revenue increased by 23% year on year, driving total revenue growth of 27% over the prior-year quarter.
While this growth is impressive, Palantir's revenue is primarily derived from a few large government contracts. This concentration risk implies that losing a major client could have a significant impact on financial performance.
That's why the company is also actively expanding into the commercial sector. The company's Foundry platform, which is intended for commercial applications, is gaining traction in industries such as healthcare, finance, and manufacturing. In Q2, commercial revenue increased by 33% year over year, indicating successful market penetration. CEO Alex Karp noted that the company now has over 300 commercial customers in the US, which is up from 14 just four years ago.
Furthermore, CAZ Investments, Eaton (ETN), Oracle (ORCL), and PwC are among the companies that have formed strategic alliances to use its AIP platform. These collaborations could strengthen Palantir's capabilities and provide access to new markets.
Palantir also reported a record GAAP (generally accepted accounting principles) EPS increase of 500% year over year to $0.06. Palantir continues to innovate its product offerings through AI, making its platforms more efficient and appealing to a wider range of clients.
In terms of liquidity, it had $4 billion in cash, cash equivalents, and short-term US Treasury securities. It also generated adjusted free cash flow (FCF) of $149 million in the second quarter and expects to generate FCF of $800 million to $1 billion for the full year.
Despite being an excellent AI growth stock, Palantir has frequently been dismissed for its exorbitant valuation relative to earnings. It currently trades at 74 times forward earnings for 2024. Analysts predict a 42.1% increase in earnings in 2024, followed by an additional 19% increase in 2025. The company has to grow its earnings consistently to justify its high valuation.
Its efforts to enter new industries and regions may help drive revenue and earnings growth. Success in the commercial sector, in particular, could significantly enhance Palantir's overall financial performance.
What Does Wall Street Say About Palantir Stock?
Overall, Wall Street rates PLTR as a "hold.” Of the 15 analysts who cover PLTR, three recommend it as a "strong buy," one as a "moderate buy," four as a "hold," one rates it as a “moderate sell,” and six rate it as a “strong sell.”
Palantir has surpassed its mean price target of $22.53. Its high target price of $38, newly raised by Dan Ives of Wedbush after earnings, indicates an upside potential of 42.9% over the next 12 months.
