The stock market is soaring. Economic data is better than expected and many influential companies have reported strong financial results that send positive signals and push valuations higher. With the Federal Reserve expected to begin cutting interest rates this year, the stars could align for a sustained uptrend.
But even though the new bull market has helped propel stock prices to record highs for some high-profile companies, some standout stocks are still trading well below their previous valuation peaks. If you're looking for investment opportunities that can help prepare you for a bull run, read on to find out why two Motley Fool contributors identified these artificial intelligence (AI) growth stocks as best buys.
An AI stock that still has great upside potential
Parkev Tatevosien (Palantir Technologies): Thanks to strong business results and enthusiasm for AI stocks, Palantir Technologies' (PLTR -0.53%) the stock soars. Nonetheless, it presents an attractive opportunity for long-term investors looking for a growth stock at a reasonable valuation. Even after tripling its value over the past year, Palantir stock remains down 38% from all-time highs reached in early 2021.
Palantir is a leading provider of AI software services that improve the operations of businesses and institutions. Palantir's sales increased approximately 275% between 2018 and 2023, from $595 million to $2.23 billion. This growth is partly explained by the fact that the company has made strong inroads with government institutions. Palantir's next wave of growth will likely come from providing more services to the private sector and small businesses. Palantir's services are best in class. The challenge has been to demonstrate that its services can work for small businesses. The company has had some success in this regard by sponsoring boot camps where it invites companies to provide the opportunity to speak with its experts and see real-world examples of what its services can offer using its relatively new artificial intelligence platform (AIP). If Palantir can reduce its service costs, it may open up a bigger opportunity for the AI pioneer.
At the same time, Palantir demonstrates how economies of scale help increase revenue and reduce operating losses. Operating losses reached $625 million in 2018. In 2023, the company reported full-year operating profit of $120 million.
Even with the huge price rally over the past year, Palantir stock still trades at a significant discount to valuations a few years ago, and offers plenty of upside potential. With a forward price-to-earnings ratio of around 63, Palantir stock still looks cheap on a historical basis.
Don't overlook the role data plays in the AI revolution
Keith Noonan (Snowflake): Advanced processing power and well-honed algorithms are key ingredients of the AI revolution, but AI systems won't actually produce much value if they aren't trained on the right data. With this in mind, Snowflake stands out as a smart play for investors looking to capitalize on the rise of AI.
Snowflake (SNOW 4.66%) is a leading provider of data warehousing software and analytics tools. The company's Data Cloud platform allows users to combine and analyze data generated across Amazon, MicrosoftAnd AlphabetCloud infrastructure services otherwise siled. This allows the company's customers to train AI systems and make operational decisions based on a much wider range of relevant data.
Recent earnings reports from Amazon and Microsoft show that AI is fueling strong demand for cloud infrastructure services. Although Snowflake's stock price has seen some positive momentum in conjunction with the encouraging numbers reported by these two cloud titans, the company's stock still has explosive potential. The company's stock price is still down about 44% from its peak, and the market may be underestimating the new tailwinds for the company.
On February 28, Snowflake will report results for the fourth quarter of its 2024 fiscal year, which ended at the end of January. The company expects product revenue to increase approximately 29.5% year-over-year to approximately $718.5 million during this period. Meanwhile, full-year product revenue is expected to be $2.65 billion, up 37% annually.
Snowflake is already showing impressive sales momentum, but the company is also in the early stages of rolling out AI-driven services that should help drive long-term growth. The software specialist is expanding the availability of services that will help its customers create artificial intelligence applications, organize unstructured data that would otherwise be unusable, and improve the performance of large language models.
For its 2029 fiscal year, Snowflake expects to post a non-GAAP (adjusted) free cash flow margin of 30%. It also expects product revenue of $10 billion. This suggests that product sales will grow at a compound annual growth rate of approximately 30.4% over the next five years, which is actually accelerating from the growth the company forecast in the fourth quarter of Last year.
With the stock still down sharply from its high, even though the broader market is in a bullish mode, investors have the opportunity to build a position in Snowflake at prices that leave room for very solid returns.
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 board of directors of The Motley Fool. Keith Noonan has no position in any of the stocks mentioned. Parkev Tatevosian, CFA holds positions at Alphabet. The Motley Fool holds positions and recommends Alphabet, Amazon, Microsoft, Palantir Technologies and Snowflake. The Motley Fool has a disclosure policy.