2 AI stocks you can buy and hold for the next decade | The motley fool

If you don’t know what artificial intelligence does or how powerful it is, just read this:

Artificial intelligence, or AI, refers to the simulation of human intelligence in machines programmed to think and act like humans. These intelligent machines are designed to learn and adapt to new situations and can be trained to perform a wide range of tasks, from the simplest to the most complex. AI has the potential to revolutionize many sectors, including healthcare, finance and education, by automating processes and making them more efficient and effective.

Although it might sound a little dry, this paragraph was actually written by ChatGPT, an artificial intelligence (AI) powered program. Feeding it prompts and watching ChatGPT do its thing is fascinating, but that’s only the surface of what the AI ​​can do.

Among the companies using AI that are making large investments are Palantize (PLT -0.14%) and CrowdStrike (CRWD 0.73%). Let’s take a look at how these companies are using AI and why they might be making big investments.

AI makes these platforms special

Palantir’s data processing platform uses AI to help its users identify potential bottlenecks in a supply chain or uncover inefficiencies in a business. However, it was first developed for government use and has helped several agencies connect the dots with terrorist organizations or detect tax evasion. More recently, he helped track down more than 15,000 people to be evacuated from Afghanistan when the US military pulled out in 2021.

IDC (International Data Corporation) ranked Palantir #1 in market share and revenue for AI platforms, demonstrating Palantir’s leadership in the market. Although the company has many accolades and a great product, its price is steep: $1 million per month for a Foundry subscription unit in the AWS Marketplace. With this cost, it reserves the use of Palantir only for the most prominent companies, which still generate a lot of business.

CrowdStrike uses AI differently: cybersecurity. Cloud-based endpoint and workload protection software generates billions of data points every week that are fed into CrowdStrike’s AI. Then it uses this information to improve the overall program, so that the protection of all other clients is improved when a client is attacked. This solution has proven to be effective and popular, as CrowdStrike grew from 1,242 customers as of January 31, 2018 to 21,146 as of October 31.

G2 also named CrowdStrike a leader in 16 different categories, showing that CrowdStrike doesn’t sacrifice quality in its extensive product line.

Both companies use AI to power their software, and both have a similar history with their finances.

A similar financial story for both companies

Palantir and CrowdStrike are growing their revenue rapidly, but they’re doing it at the expense of profitability.

Source: Palantir and CrowdStrike. YOY: year after year. Note: Palantir’s third quarter ended on September 30 and CrowdStrike’s third quarter ended on October 31.

Unfortunately, Palantir grows much slower than CrowdStrike, so it will have a harder time closing its profitability gap. Still, both companies are profitable on a free cash flow basis, with Palantir generating $36.6 million in Q3 (an 8% margin) and CrowdStrike generating an impressive $174 million (a 30% margin). . So how do two unprofitable businesses make so much money? They pay their employees with stock.

In the third quarter, Palantir and CrowdStrike each paid out $140 million in stock to their employees — a non-cash expense. While CrowdStrike is still profitable on a free cash flow basis, when that’s subtracted, Palantir isn’t. This is a significant cost to shareholders, as their holdings are diluted as companies flood the market with new shares. While not uncommon for start-ups, both are beginning to mature, so these expenses should level off or, ideally, drop.

After the recent sale of CrowdStrike, the two companies are now trading in a fairly normal valuation range for software companies.

CRWD PS Ratio data by YCharts.

Since the valuation does not present as much risk, it now depends on the sustainable profitability of the two companies. I think CrowdStrike will have a much easier time achieving this goal, but it will take Palantir a lot longer. So while I think both companies will do well in the long run, CrowdStrike is a best buy right now, even if customers are becoming harder to acquire in the current economic environment.