1 Artificial Intelligence (AI) Stock Gen Z Should Buy Today and Hold for Decades
1 week ago
Are you a believer in the game-changing potential of artificial intelligence (AI)? Here's a litmus test: Are you willing to make a long-term commitment to one of the market's most compelling AI stocks, even though the underlying company is still miles away from results that justify the stock's presently frothy price?
If you're a Gen Z investor and your answer to this latter question is "yes," then you might want to de-prioritize its rich valuation and go ahead and dive into Palantir Technologies(NASDAQ: PLTR) with plans to hold it for the long haul. You'll need to hold onto it for decades to extract the stock's full potential value.
You're almost certainly aware that major corporations have been collecting digital consumer data for years now. Using this information effectively, however, hasn't been easy. Companies can access, collate, and parse it, but there's not always a means of turning it into great actionable insights.
That is, until now. With the advent of artificial intelligence platforms, institutions of all shapes and sizes can do some incredible things with all their data (including the gathering and creation of even more information).
To say Palantir Technologies is one of the outfits providing this sort of platform for AI-powered decision-making is a considerable understatement. It's the dominant name in its particular sliver of the AI software market.
But what does the company do in practical terms?
Perhaps it's best to explain what Palantir is by explaining what it isn't. It isn't a consumer-facing platform like ChatGPT or Alphabet's Gemini, both of which are impressively fluid personal chatbots, but neither of which is capable of doing the higher-level tasks that enterprise-level users need done. Palantir's platform, in contrast, is well-suited for work like helping the military manage combat situations, assisting the U.S. Department of Health and Human Services in its efforts to predictively combat the spread of the COVID-19 pandemic, and helping companies operate more efficiently by identifying wasted resources, spotting potential problems, or even detecting fraud.
In other words, it's not just a conversational assistant that can handle a handful of basic tasks. It's a complete top-down system capable of answering questions that institutional leaders weren't even dreaming of asking.
There aren't very many of these platforms available, and even fewer that can legitimately compare to Palantir's.
The technology is ready for corporate and government users, but that doesn't necessarily mean these users are ready for Palantir's solution. As The Motley Fool's own in-house research arm reports, only 6.8% of U.S. businesses currently utilize AI-powered decision-making platforms. The chief adoption roadblock is simple uncertainty as to how to turn this tech into a moneymaking tool; recent data from Boston Consulting Group suggests that only 25% of companies that have begun using corporate-minded AI are seeing meaningful value from their investments.
It's coming, though. As a report from Precedence Research suggests, the global decision-intelligence software market is poised to grow at an annualized pace of 15.7% through 2034. The key is simply to further educate would-be users about its usage and benefits -- just as the personal computer, ride-hailing, and electric-vehicle industries (to name a few) had to after their relatively slow starts.
Palantir Technologies shouldn't have to take quite that long to get rolling, however. Indeed, this year's top-line growth is projected to be more than 30%, to be followed next year with revenue growth that's almost as strong. Those forecasts imply that companies are finally starting to embrace higher-level AI in earnest. The Motley Fool's research indicates that while less than 7% of U.S. businesses currently utilize AI tools, this number is likely to grow to 9.3% within the next six months ... a 37% increase in just half a year.
That's likely just the beginning. Technology market research outfit IDC believes worldwide annual spending on AI tools, infrastructure, and related services will more than double from last year to 2028 when the yearly outlay should be in the ballpark of $630 billion.
So why is Palantir a top prospect for the Gen Z crowd (currently aged 13 to 28) but not for Gen X or millennial investors?
It's not necessarily a bad pick for anyone, to be clear, except perhaps for retired investors who need their portfolios to maintain a minimum income-producing value. The stock's 34% pullback from February's record high is a not-so-gentle reminder that Palantir stock is still incredibly volatile. And it could remain so for as long as it takes investors to figure out what it should be worth, in both the near and distant future.
Its steep valuation is making that even more difficult to do in the meantime. Shares are currently priced at more than 140 times this year's expected per-share earnings of $0.56, and over 110 times the coming year's likely bottom line of $0.70 per share. It could take years for Palantir's bottom line to become big enough to make its stock's valuation comparable to those of similar stocks.
But the opportunity is there if you're willing to patiently wait for it.
See, not unlike Amazon since its initial public offering back in 1997, Palantir's growth runway is long, steep, and pretty darn certain -- if only because the 93% of U.S. businesses that aren't using artificial intelligence right now are quickly coming around. Like Amazon, this company is capable of growing into its stock's high price even as the bullish story unfolds, keeping shares expensive en route. It could take many years -- perhaps decades -- for Palantir's results to finally catch up with its valuation.
In other words, you need to be able to sit on this stock for decades just to ensure that eventually, it fully reflects the value of what the company offers its customers as well as its investors.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, and Palantir Technologies. The Motley Fool has a disclosure policy.
