You may have experimented with ChatGPT or some of the other major language models that are part of a new frontier in which artificial intelligence (AI) is changing the world around us. Is this a new reality or a fad? Considering how many billions of dollars companies are investing in a technological arms race, it’s safe to say that AI isn’t going anywhere.
Still, it would make sense to have some AI exposure in your stock portfolio. We appear to be in the early stages of understanding what AI can do today and what it can do in the future. It is important to think in terms of decades and invest in companies that are ready to benefit from every advance in AI.
After sifting through the best of Wall Street, Nvidia (NASDAQ:NVDA), Snowflake (NYSE: SNOW)And Palantir Technologies (NYSE:PLTR) distinguished themselves as companies that were already successful today and were prepared to continue their success for years to come.
Here’s what you need to know.
The early AI king wears the crown
Nvidia’s early and confident lead in the semiconductor AI competition has attracted a lot of attention from investors. Its shares rose over 400% in the last few years after it became clear that AI tailwinds were significantly boosting Nvidia’s data center business. Nvidia’s graphics processing unit (GPU) chips specialize in demanding computing applications such as AI, and the company’s CUDA software made it easy for customers to harness the chips’ power.
Today, analysts say Nvidia’s market share in AI chips could be between 80% and 90%, a staggering figure for an industry that could grow to hundreds of billions of dollars by the early 2030s. Remember that Nvidia’s total revenue for the last four quarters was $61 billion. So there is still a lot of potential for growth – even if competition is slowly eating away at Nvidia’s market share control.
Nvidia’s competitive advantage grows the longer it dominates the AI chip market. The company’s free cash flow jumped to $27 billion last year, a financial war chest it can use to develop cutting-edge chips and outpace spending by others. This also means that investors could engage in large share buybacks in the coming years, which will only increase overall investment returns.
Snowflake makes it easier to use data
Chips do the computational work in AI, but data is the oxygen that brings AI to life. An AI model is only as effective as the data it is trained on, which makes a company like Snowflake very valuable. Snowflake is a cloud-based data storage and analytics platform that allows customers to store their data and easily query or enhance it by incorporating third-party data from their marketplace. Snowflake integrates with major cloud platforms, so combining cloud computing with customer data makes AI models work.
Financially, Snowflake could grow virtually endlessly. Data is growing exponentially and Snowflake is billed based on usage. The more data companies store and analyze, the more they spend on Snowflake. The company has an excellent net revenue retention rate of 131%, meaning Snowflake can maintain double-digit growth without adding new customers.
But snowflake Is Add customers. The company has 9,437 customers today, compared to 7,744 a year ago. There are thousands of companies worldwide, meaning Snowflake could be at the start of a decades-long growth story.
Palantir’s technology drives businesses forward
Artificial intelligence could eventually be everywhere, but few companies will develop their AI applications from the ground up. Palantir Technologies plays an important role in delivering turnkey applications. The company operates three platforms: Gotham, Foundry and AIP, on which custom software can be built and deployed. Palantir built its business with the US government but has since expanded to the private sector. Today, Palantir’s revenue is split about half between the public and private sectors.
The company’s commercial potential is the main reason investors should consider Palantir as a decade-long investment. Today, Palantir “only” has 497 customers. We called Snowflake, a company that has acquired 10,000 customers, a company with a lot of room for growth. Based on this logic, Palantir has even more room to grow in the coming decades.
Financially, Palantir is already in great shape. The company is profitable according to generally accepted accounting principles (GAAP), generating $2.2 billion in revenue last year. The company generates $697 million in annual free cash flow and has a fortress-like balance sheet with $3.6 billion in cash and zero debt. This is also a financially sound company that still has a lot of growth ahead of it. These aspects of a stock can generate excellent investment returns for years to come.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Palantir Technologies, and Snowflake. The Motley Fool has a disclosure policy.
Artificial intelligence (AI) is going nowhere. Here are 3 stocks you should buy and hold for decades. was originally published by The Motley Fool