The rapidly growing adoption of artificial intelligence (AI) has boosted the shares of many companies in recent years, which is not surprising as this technology is expected to have a major impact on the global economy.
According to management consulting giant PwC, generative AI could contribute as much as $15.7 trillion to the global economy by 2030 by driving productivity gains and product improvements that will lead to better consumer demand. Not surprisingly, several companies are trying to make the most of this opportunity by integrating AI-focused offerings into their products and services.
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The good thing is that many of these companies have witnessed a nice increase in their business thanks to AI, a trend that is likely to continue given that the technology is currently in the early stages of growth. That’s why buying and holding solid AI stocks for a long time could be a smart move. Such a strategy allows investors to take advantage of this disruptive trend while benefiting from the power of compounding.
This article discusses two AI stocks that appear to be a good fit for investors looking to build a multi-million dollar portfolio. AI adoption is already having a positive impact on both companies, and they can deliver excellent long-term profits for investors thanks to the lucrative markets in which they operate.
Supplier of software platforms Palantir Technologies(NYSE:PLTR) went public just over four years ago in September 2020. The stock is up a remarkable 544% since then (at the time of writing), with most of its gains seen since last year.
Someone who invested $1,000 in Palantir stock when it went public would now be sitting on more than $6,400. More importantly, this red-hot stock has room for more growth in the long term as it begins to benefit from the booming demand for AI software platforms.
The company’s third-quarter 2024 revenue rose 30% year over year to $726 million, along with a 43% increase in adjusted earnings to $0.10 per share. Palantir’s growth has kicked into high gear as the company’s revenue rose at a slower pace of 17% in the same quarter last year. Solid demand for Palantir’s Artificial Intelligence Platform (AIP), which allows users to integrate generative AI solutions into their operations to make them more effective, is playing a central role in driving this accelerated growth.
Palantir CEO Alex Karp said in his recent shareholder letter that AIP has “transformed our business.” Robust demand for this AI software platform led to impressive growth in the company’s customer base and deal size. For example, Palantir’s customer base rose 39% year over year in the third quarter, an improvement over the 34% increase in the same quarter last year.
Additionally, the company closed 104 deals valued at $1 million or more in the previous quarter, compared to 80 in the same quarter last year. This combination of an increase in the company’s customer base and the larger deals the company is signing has allowed Palantir to build a significant revenue pipeline.
The company’s remaining deal value at the end of the previous quarter was $4.5 billion, up 22% from the previous year. This measure refers to the ‘total remaining value of contracts at the end of the reporting period’. Meanwhile, Palantir’s existing customers are also increasingly using the company’s services. This is reflected in the net dollar retention rate of 118% in the third quarter, a nice jump from 107% in the same period last year.
Palantir said this metric is calculated by dividing the last twelve months of revenue at the end of a quarter by the last twelve months of revenue recognized by the same customers in the same period last year. So a score above 100% suggests that Palantir’s existing customers are spending more on the offering. This also explains why Palantir’s adjusted operating margin increased 11 percentage points to 37% in the first nine months of 2024, leading to excellent earnings growth.
More importantly, market research firm International Data Corporation (IDC) estimates that the market for AI software platforms could reach $153 billion in revenue by 2028, up from just $28 billion last year. There is therefore still a lot of room for Palantir to achieve further growth in turnover and profit in the long term. This is why investors looking to buy an AI stock that could help them build a million-dollar portfolio can still consider this software specialist before it flies higher.
British technology company Arm positions(NASDAQ:ARM) went public last September and shares have more than doubled since then, with outstanding gains of 102% at the time of writing. However, a closer look at the company’s business model will show that it still has many advantages to offer.
After all, Arm’s intellectual property (IP) is used by chip makers and Original Equipment Manufacturers (OEMs) to design chips. Arm licenses its chip designs to customers for a fee and also receives a royalty from them for each chip manufactured and sold using its intellectual property. The good thing is that Arm has a healthy market share in multiple semiconductor end markets.
For example, the company says that 99% of smartphone application processors are manufactured using its designs. What’s worth mentioning here is that even though the smartphone market is growing slowly, Arm’s royalty revenue from this segment has been increasing at a nice clip. More specifically, Arm’s smartphone royalty revenue rose 40% year-over-year in Q3 2024, significantly outpacing the increase in smartphone sales during the same period.
Arm management pointed out that the stronger growth in smartphone royalty revenue was driven by the increasing adoption of the Armv9 architecture, which has a higher royalty rate than the previous architecture. Armv9 now accounts for 25% of Arm’s total royalty revenue, suggesting there is still plenty of room for growth in the future.
A key reason why Armv9 adoption should gain momentum is because the company designed this architecture to tackle AI workloads. This explains why the architecture has been used by Apple to design the chipset for its AI-enabled iPhone 16 series. With demand for generative AI smartphones set to grow 78% annually through 2028 to 912 million units by the end of the forecast period, it won’t be surprising to see more and more companies turn to Arm to design their AI chipsets, according to IDC.
Additionally, Arm points out that Armv9 is also gaining popularity in the cloud computing market. Nvidiafor example, developed its Grace AI CPU (central processing unit) using the Armv9 instruction set. Again, this is another area that could drive excellent growth for Arm as demand for AI chips will grow at an incredible pace in the long term.
All this explains why analysts are predicting an acceleration in Arm’s earnings growth. The company expects to end the current fiscal year with earnings of $1.55 per share, which would be a 22% improvement from the prior fiscal year’s $1.27 per share. However, growth forecasts for the coming years are stronger.
ARM EPS estimates for the next fiscal year
ARM EPS estimates for next fiscal year data according to YCharts.
So, like Palantir, there’s a good chance Arm can continue its impressive stock market rally thanks to healthy AI-powered earnings growth. Furthermore, given the critical role Arm plays in the global chip market, it seems an ideal solution for a multi-million dollar portfolio due to the business model that has helped it build a solid moat.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
2 Artificial Intelligence (AI) Stocks That Could Make You a Millionaire was originally published by The Motley Fool
