One of the biggest themes that helped drive the market last year was artificial intelligence (AI). The technology, which in the past was relegated to science fiction, has suddenly become mainstream. Companies, meanwhile, have been racing to become AI leaders, viewing it has a generational opportunity.
Let's look at three stocks that are greatly benefiting from AI.
Palantir
Known as one of the U.S. government's most important vendors, Palantir Technologies (PLTR -4.97%) and its data gathering and analytics solutions have been used for such critical tasks as fighting terrorism and tracking COVID-19 cases. However, the company has now been able to incorporate AI into its solutions to begin helping commercial customers address their own mission-critical needs.
While many large tech companies have focused on developing the best AI models, Palantir instead has decided to focus on the applications and workflow layers of AI software to improve logic and functionality. This helps AI better carry out actions in real-life applications. Its AI platform is designed to be the operational layer of an organization, where digital assets, such as data sets and models, are then connected to their real-world counterparts, such as products or customer orders.
The company's solutions have been seeing huge demand from commercial customers, with its U.S. commercial revenue rising 54% last quarter to $179 million, while its U.S. commercial customer count soared 77%. Meanwhile, the U.S. government, its largest customer, is also starting to embrace AI solutions.
Thus far, much of Palantir's early success in AI has been with proof-of-concept prototype work. It has done a great job of acquiring commercial customers through its Artificial Intelligence Platform (AIP) boot camps, where it demonstrates to customers how its technology can be applied to potential use cases while providing onboarding and training. The big opportunity moving forward is moving these customers from proof of concept to production. This should help accelerate the company's overall revenue growth, which was 30% last quarter.
The one knock on Palantir is valuation, as the stock currently trades at 42 times forward price-to-sales ratio.
Image source: Getty Images.
AppLovin
Another company that has greatly benefited from AI is AppLovin (APP 1.22%). The company owns a portfolio of apps, but its primary business is an adtech solution that helps gaming apps attract and better monetize customers.
Since the launch of its AI-powered Axon 2 solution in early 2023, the company's revenue has soared as gaming apps have embraced its technology. Existing customers have begun to spend more and it also attracted a lot of new customers. Axon 2 uses predictive machine learning to target ads toward users most likely to download those apps.
The success of Axon 2 can be seen in AppLovin's software platform revenue, which surged 66% to $835 million last quarter. Even more impressive is that this revenue growth was on top of the 65% software platform revenue growth it saw a year ago in Q3 2023.
The company's solution appears to be taking away business from Unity Software, whose comparative "grow solutions" segment saw a 5% decline in revenue last quarter. Axon 2's success is also leading to a big improvement in the company's gross margin as well, which rose from 69.3% a year ago to 77.5%. This, in turn, is leading to even better profitability growth.
AppLovin has said it expects revenue growth with gaming customers to settle into the 20%-to-30% range longer-term, but its bigger opportunity is moving its adtech platform beyond gaming. The company has been piloting Axon 2 with e-commerce companies with early success, and it expects this new vertical to become a meaningful contributor in 2025.
The stock currently trades at forward price-to-earnings (P/E) ratio of 39.5 based on 2025 analyst estimates with a price/earnings-to-growth (PEG) ratio of 0.63. A PEG ratio below 1 is considered undervalued and growth stocks will often have multiples well above 1.
Broadcom
Semiconductor maker Broadcom (AVGO 1.66%) has begun making waves in AI chip market, where the company is working with customers to design custom AI chips for such things as AI training and inference. Alphabet was its first big customer in this arena with its tensor processing units (TPUs), which it has credited as being a key differentiator that helps reduce inference processing times and lower costs.
Broadcom's custom chips are designed for very specific tasks and as such perform better at those tasks than graphics processing units (GPUs), which offer more flexibility. For example, Alphabet's TPUs are optimized for tensor operations within Google's Cloud's TensorFlow framework. Tensor operations are a form of high-level mathematics used in AI deep learning.
The company has been seeing strong growth from its custom AI chips, which topped $12 billion in revenue in fiscal 2024. Meanwhile, the company has been steadily adding new customers.
Last quarter, the company said its three large custom AI chip customers -- believed to be Alphabet, Meta Platforms, and ByteDance -- were each planning to deploy 1 million AI chip clusters by 2027, which would equate to an addressable market of between $60 billion to $90 billion in fiscal 2027 alone. Meanwhile, it said two additional customers -- believed to be OpenAI and Apple -- were moving forward in their chip development, which could increase this number even more.
If the custom AI chip market continues to take off, Broadcom looks poised to be the biggest winner. The stock currently trades at forward P/E of 36.5 based on this fiscal year's analyst estimates (ending November 2025), which isn't expensive if it can take advantage of its AI chip opportunity.
