Your investment strategy should include exposure to artificial intelligence since it will shape the future.
AI is a fascinating technology that hasn’t been used to its fullest potential yet. Amazing AI programs like ChatGPT have already passed the bar exam and the U.S. medical licensing exam, but businesses can already use AI in other, more useful ways.
CrowdStrike (CRWD 4.91%) and Palantir (PLTR 9.63%) are two companies whose product is built around AI. Each stock has a long way to go, and investors should think about adding these two to their portfolios to fill out their AI investments. Find out why by reading on.
CrowdStrike uses AI to keep making its security software better. CrowdStrike uses AI’s power in a machine learning model to look at trillions of signals every week to figure out what activity is normal, unusual, or a threat. When one client is attacked, CrowdStrike uses what it learns to improve the security of all its clients. This way, an attacker can’t take advantage of the same weakness twice.
As of October 31, 2022, there were 21,146 clients of the solution, which is 44% more than the same time last year. 40 U.S. state governments, 69 of the Fortune 500, and 15 of the top 20 U.S. banks are among its customers. That’s an impressive list of clients, but CrowdStrike’s growth in the future will depend on those clients using it more.
CrowdStrike has more than 20 modules that add to the basic offering and gives security teams more ways to improve the platform and see what threats a client is facing. CrowdStrike makes more money the more modules the average customer uses, and it has done a good job of selling more modules to its customers.
CrowdStrike’s annual recurring revenue grew by 54% to $2.34 billion in the third quarter of the fiscal year 2023, thanks to new customers and more business from existing clients (ended October 31). It’s also a machine for making free cash flow (FCF). It turned 30% of Q3 revenue into $174 million in FCF.
CrowdStrike is currently selling at a discount, at 43 times FCF. Compared to Microsoft, whose growth is far slower, there is merely a 35% premium. Investing in CrowdStrike, which is just beginning to launch its products, is one of the finest ways to get in on the ground floor of artificial intelligence.
Palantir’s software uses AI to crunch data and give usable insights. At first, its technology was made for the government, and it is said to have helped the U.S. government find Osama bin Laden’s last hiding place. Now, Palantir is making its software available to the general public. Its goal is to help companies streamline their operations.
Tyson Foods saved about $200 million in costs across 20 different projects, which shows how useful Palantir is. Swiss Re was the first company to save $100 million or more using Palantir. As for new customers, Cloudflare just signed a strategic partnership with Palantir to lower the costs of Cloudflare’s cloud infrastructure service.
As of September 30, only 228 businesses were using it. Investors may wonder why so few businesses are using it. The answer is in the price: an Amazon Web Services (AWS) subscription costs $1 million per month. Because of the price, only the biggest companies are likely to be able to use Palantir’s product. But that’s still a big number of customers.
It’s also growing quickly, with revenue up 22% year over year to $478 million. But U.S. commercial revenue, which is a very important part of business, went up 53% in Q3. Unlike CrowdStrike, Palantir has a long way to go before it can make money. FCF for Q3 was $32.6 million, which is a margin of 6.8%.
With a loss of $124 million, Palantir has a negative profit margin of 26%. The high stock-based compensation cost of $140 million is a major contributor to the deficit, but it is far lower than the $185 million it was in Q3 of 2021. Given how long it took Palantir to start making money, shareholders will want to keep an eye on this trend to make sure it keeps going in the right direction.
With Palantir’s current price-to-sales ratio (P/S), it’s pretty clear that the market isn’t sure it will make any money.
Palantir is worth a try at its current price, especially since it has powerful AI software. But you’ll have to be patient because profits may not come for a while.