Do you remember first hearing about this strange thing called “the cloud”? It was probably sometime in the 2010s. Many said it would be a massive boon for tech companies — and they were right.
Spending on public cloud usage rose from $31 billion in 2015 to nearly $200 billion in 2023. Microsoft‘s Intelligent Cloud and Amazon‘s (AMZN 2.71%) Amazon Web Services (AWS) provide terrific revenue streams with annual run rates of over $100 billion each. This technology has been the linchpin driving total returns of over 900% since 2015 for both stocks.
Artificial intelligence (AI) looks like the next big thing. Some say it will be as transformative as the internet. The International Monetary Fund says it will change nearly 40% of jobs worldwide, and data compiled by Statista shows the AI market will increase sixfold from $300 billion this year to over $1.8 trillion by 2030.
Here are four companies taking advantage of the growth in AI with the potential to make investors very happy in the next six years.
Palantir (PLTR -0.53%) is a popular stock, and much of the hype is deserved. Managing, analyzing, and using data to optimize decision-making are at the core of its business. And its platforms for the private sector and governments use AI to do this.
Palantir’s newest product, Artificial Intelligence Platform (AIP), is also built for the defense and the private sectors, where it deploys on the customer’s network and leverages large language models (LLMs). What exactly does this mean? Here’s an example from Palantir.
Say that you’re a military operator in charge of forces in the field, and data comes in saying the enemy is amassing equipment nearby. The operator can visualize the field and ask questions such as, “What enemy units are nearby?” and “What are likely enemy formations?” Then, they can direct drones or satellites to capture images. Using this technology assists the operator with planning and operational decisions.
Palantir has historically done well with defense revenue. This is a terrific source of income because governments have deep pockets. However, the private sector also offers a massive marketplace.
The company’s commercial revenue grew 32% year-over-year (YOY) in the fourth quarter of 2023 to $284 million (an acceleration from the 23% YOY growth in Q3), and government revenue grew 11% to $324 million. Palantir was also profitable on a generally accepted accounting principles (GAAP) basis for the fifth straight quarter — an impressive achievement for a high-growth tech company.
The stock trades for 25 times sales, which isn’t cheap, but this falls to 20 on a forward basis using sales estimates. There’s short-term risk because of the valuation, so consider buying over time. In the long term, Palantir’s AI credentials are top-notch.
Here’s a phrase to add to your vocabulary: robotic process automation (RPA). This takes tedious and non-value-adding tasks and automates them.
For example, a mortgage broker may spend hours reviewing emails, downloading attachments, and manually entering data into applications. With RPA, this can be automated, freeing the broker to focus on higher-level tasks like communicating with underwriters and reaching out to customers. This is an example of what UiPath (PATH 8.17%) can do for its customers.
Speaking of customers, UiPath boasts over 10,800 of them, and they provide $1.4 billion in annual recurring revenue (ARR). Sales came in at $326 million in the third quarter of UiPath’s fiscal 2024 (the three months ended Oct. 31, 2023) on 24% growth, which is impressive, considering the challenging economic environment in 2023. UiPath also has a fortress-like balance sheet with $1.8 billion in cash and investments and no long-term debt.
UiPath has stiff competition in a fragmented industry, which may be the most significant risk for investors. The company is also not GAAP profitable, although it is cash-flow positive. The stock trades for 11 times sales, which is reasonable for the industry.
RPA has the potential to save companies vast amounts of money by automating low-level tasks, and UiPath could be a significant long-term beneficiary of this trend.
Before I delve into this company, please note that this stock has a market cap of less than $1 billion, making it more speculative than others. Managing risk is crucial, so speculative stocks should only occupy a set portion of your portfolio, based on your age, i.e., how much time you have to make up losses, and risk tolerance. With that understanding, Evolv Technologies (EVLV) sells fascinating technology that could save your life (and maybe make investors loads of money).
Currently, when entering a stadium or other venue, people stand in line to go through a metal detector one at a time, empty their pockets, and often get a second screening with a wand. It’s inefficient, and items are often missed.
Evolv’s technology is different. Multiple people can walk through the AI-powered machines, and the detectors look at various characteristics, such as shapes, to identify guns or knives, rather than alerting for everything metal, like car keys. Alerts show security personnel where the object is detected, and they take it from there.
Schools, hospitals, and stadiums are the target customers for Evolv. Several major sports teams, school districts, and medical campuses already use it. Ending ARR in Q3 2023 was $66 million on 129% year-over-year growth, and subscriptions jumped 137% to just over 4,000. With a market cap of $676 million, Evolv trades at a reasonable 10 times ARR and has loads of potential.
I said there was at least one company in this article that you may have never heard of, but it’s probably not this one. Amazon is known for its online marketplace, but will also benefit tremendously from AI since AWS is the world’s leading cloud service provider.
AI software requires tons of data, and much of this will be processed in the cloud. Amazon also offers other AI solutions, like foundational models — which allow users to tailor AI software to their needs.
Amazon just released its Q4 2023 earnings, and they were spectacular. Total revenue was up 14% to $170 billion, along with significant increases in cash flow and operating income. As depicted below, the stock rose but still trades below its five-year average, based on sales and cash flow.
AI will give Amazon a boost that should please investors for years to come.