Want to Get Richer? 2 AI Stocks to Buy Before They Skyrocket

Want to get rich? 2 AI stocks to buy before they skyrocket

The S&P 500 has had a strong first half of 2023 and is up over 17.5% so far this year — thanks largely to an AI-driven equity rally and easing inflation. The US economy also proved resilient, posting an unexpected year-on-year growth rate of 2.4%.

On that note, several analysts believe (with varying degrees of caution and optimism) that Wall Street may now be in the early stages of a bull market, especially as the S&P 500 has rallied more than 20% since its October 2022 low.

Investors looking to take advantage of the momentum of this bull rally should consider opening small positions in two AI stocks: Palantir (NYSE: PLTR ) and Alphabet (NASDAQ: GOOG ) (NASDAQ: GOOGL ). Here's why.

Palantir

Data mining and analytics specialist Palantir has been a major beneficiary of Wall Street's artificial intelligence (AI) rally. But while the company's stock has gained nearly 209% so far this year, it still has significant upside potential. Veteran Wedbush analyst Dan Ives seems to agree with this assumption; recently initiated coverage for the company with an Outperform rating (Buy) and a $25 price target.

While many companies are now racing to come up with AI-based solutions, Palantir has been offering AI-based services to its clients for two decades. Not resting on its laurels, the company launched a new AI platform (AIP) in April. Palantir AIP enables clients to deploy large-scale language models on a company's internal network and leverage proprietary data to personalize recommendations, actions, and workflows. With its like services, AIP has seen unprecedented demand from military clients.

While AIP may prove crucial for Palantir in the long term, the company has also impressed short-term investors with its focus on profitability. The company posted a GAAP (generally accepted accounting principles) profit in the first quarter for the second quarter in a row and expects to remain profitable in all quarters through 2023. The company is also free cash flow positive and had $2.3 billion in cash. has no debt on its balance sheet at the end of the first quarter.

There's no doubt that Palantir is an expensive stock, trading at roughly 21 times sales -- much higher than the software industry's median price-to-sales ratio of 2.4. However, considering that Goldman Sachs expects generative AI to help boost global GDP by 7% or $7 trillion over the next decade, well-established AI stocks could see much higher prices in the coming months.

Since the launch of OpenAI's ChatGPT, many analysts and investors have worried about the growth prospects of Alphabet, which derives more than half of its revenue from Google Search. While the dent that generative artificial intelligence could make to Alphabet's near-monopoly in the Internet search space is now all but obvious, there are still several factors that could push the trillion-dollar company's stock higher.

First, demand for advertising is expected to recover in a growing economy — and that's boosting revenue from Google Search and YouTube. Google Search revenue rose 4.7% year-over-year in the second quarter, compared to the 1.9% year-over-year revenue growth it saw in the first quarter. YouTube's revenue also rose 4% in the second quarter, a significant improvement from its 2.6% decline in the first quarter.YouTube's audience is also growing steadily: 2 billion monthly active users watch short videos on the platform, and 150 million people in the US access YouTube on their connected TVs.

Second, Alphabet posted a 28% year-over-year jump in revenue to $8 billion and an operating profit of $395 million (5% operating margin) for its Google Cloud business. Currently, 70% of generative AI unicorn companies use Google Cloud. While Google Cloud's long-term growth potential is strong, management indicated some caution about the company's growth prospects in the second quarter as customers continue to optimize their cloud spending.

Third, Alphabet is well-positioned to benefit from the surge in interest in all things AI. It has built an infrastructure that is widely used to train generative AI models. Alphabet's Bard chatbot and next-generation conversational chatbot LAMDA (both based on large language models) could prove to be tough competition for ChatGPT. The company also offers a huge selection for AI supercomputers and recently launched the A3 AI supercomputer, which is powered by the Nvidia H100 AI chip. Finally, demand for Alphabet's AI models increased more than 15 times from April 2023 to June 2023. These trends suggest that there is significant monetization potential in Alphabet's AI business.

Thanks to its stellar second-quarter share price performance, the search king is no longer cheap. Alphabet currently trades at 33.4 times earnings, significantly higher than the software industry's median price-to-earnings multiple of 16.9. However, given the improving advertising landscape, the strength of the Google Cloud platform and its AI initiatives, Alphabet could prove to be an attractive option even at this elevated valuation.

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*The Warehouse Advisor returns from August 1, 2023Suzanne Frey, of Alphabet, is a board member of The Motley Fool. Manali Bhade has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.

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