1 stock to consider buying (potentially the biggest winner of the AI arms race!)

Muhammad Cheema thinks Palantir is a stock to consider buying and discusses why it’s one of his favourites in the fast-growing AI space.

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It’s no secret that the artificial intelligence (AI) ‘arms race’ has been intensifying recently. It’s starting to have a big impact on society, with some claiming it will be as transformative as the industrial revolution. A lot of companies in this field are in a prime position to see demand for their services soar. I think a stock to consider buying in this space is Palantir (NYSE:PLTR).

What does it do?

The company specialises in software for big data analytics. It has a few different products.

Gotham is used by governments and public organisations, particularly within the intelligence community and the US Department of Defense (DoD).

Foundry is used more by commercial clients, helping them find trends and efficiencies. In April 2023, its AI platform (AIP) was also launched for clients to use as a generative AI tool.

Apollo is the operating system for the other products. It ensures critical information is secure and up to date. It’s one of just five software-as-a-service offerings that are cleared for mission-critical National Security Systems by the DoD. It being used in clandestine operations shows it’s one of the best software services around.

Competitive threats

It’s worth noting that Palantir faces some competition.

Databricks is a similar start-up that accumulates large sets of data from many systems. It already has a revenue run rate of $1.5bn, growing at 50% year on year. Nvidia invested in it recently.

Furthermore, Microsoft’s Fabric offering also represents competition. With its superior financial resources, this could develop into a bigger threat.

Why it’s among the winners in the race

Even with intense competition, Palantir still stands out to me as one of the best companies in the AI space.

Growth has been very strong. Government revenue rose by 14% in 2023 to $1.2bn (out of $2.2bn of total revenue). But while it’s rising at a nice and steady pace, it’s not part of the business that truly excites me.

Its commercial revenue is growing a lot faster, at a rate of 20%, to $1bn. Looking more into the details this figure is still accelerating. In the final quarter of 2023, commercial revenue grew by 32% to $284m. US commercial revenue particularly stands out, rising by 70% to $131m.

The new AIP product has seen particular enthusiasm from clients, which has helped to fuel this growth.

Additionally, it’s guiding that US commercial revenue will rise by at least 40% in 2024. This is likely to be the key growth driver for the business going forward.

Now what?

Palantir had a very successful 2023.

Its share price has responded in kind, rising by a mammoth 279% since the start of 2023.

Some will point out its valuation. Admittedly, it’s quite high and that’s a risk. With a price-to-sales ratio of 24 its shares aren’t cheap.

However, I’m a foolish investor, with a long-term view.

The AI world continues to grow at strong levels and Palantir is in a great position to grow along with it. Therefore, its shares may not look so expensive in the long term.

Moreover, the company became profitable for the first time last year. I’m excited by the forecasts of earnings growth outpacing revenue growth.

That’s why I’ll be continuing to buy shares in this AI company.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Muhammad Cheema has positions in Palantir Technologies. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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