The artificial intelligence (AI) gold rush is in full swing, and Nvidia has been one of the biggest winners thus far. Its chips power the most advanced AI systems, including ChatGPT from OpenAI, and its share price rocketed 230% over the past year. But Goldman Sachs thinks software and services companies could be the biggest beneficiaries in the long run..
Several Wall Street billionaires seem to be thinking along the same lines. The hedge fund managers listed below sold down their positions in Nvidia in the fourth quarter and reinvested capital in AI stocks that fit more neatly into the software and cloud services categories.
- Israel Englander at Millennium Management sold 1.7 million shares of Nvidia, reducing his stake by 45%.
- Steven Cohen at Point72 Asset Management sold 1.1 million shares of Nvidia, reducing his stake by 66%.
Meanwhile, Englander and Cohen purchased shares of Amazon(NASDAQ: AMZN) and Palantir Technologies(NYSE: PLTR) during the fourth quarter, supercharged AI stocks that soared 84% and 170%, respectively, over the past year.
1. Amazon
Amazon reported fourth-quarter results that crushed Wall Street's expectations. Sales increased 14% to $170 billion, the third straight quarter in which growth has accelerated sequentially. That was primarily due to momentum in advertising and retail, but cloud computing sales also accelerated from the previous quarter. Meanwhile, GAAP net income improved to $1.00 per diluted share, up from $0.03 per diluted share in the prior year.
Amazon is set to maintain that momentum given its strong presence in three markets. It runs the most popular e-commerce marketplace in the world as measured by monthly visitors, and the largest online marketplace in North America and Western Europe as measured by sales. Amazon is also the largest retail advertiser and the third largest ad tech company in the world. And Amazon Web Services (AWS) is the largest provider of cloud infrastructure and platform services.
That puts Amazon on a glidepath to double-digit sales growth through 2030. I say that because the online retail, digital advertising, and cloud computing markets are projected to grow at annual rates of 8%, 16%, and 14%, respectively, during that period. Indeed, with those tailwinds at its back, Wall Street expects Amazon to grow sales at 11% annually over the next five year.
However, Amazon could surprise Wall Street depending on how successfully it monetizes artificial intelligence (AI), particularly in its cloud computing business. The company has designed custom chips for AI training and inference, called Trainium and Inferentia. Those chips cannot outperform Nvidia graphics processing units (GPUs), but they are more cost effective in certain situations and could bring more business to AWS.
Additionally, Amazon Bedrock is a cloud service that lets businesses customize large language models and build generative AI applications. Likewise, Amazon Q is a conversational business assistant that leans on generative AI to search and summarize information from various internal and external data sources. The chatbot can also answer questions and automate tasks like writing blogs and social media posts. Collectively, those products could drive faster-than-expected sales growth for Amazon.
Shares currently trade at 3.4 times sales, a tolerable valuation if Wall Street's consensus is correct and a more reasonable valuation if the company manages to grow sales faster than 11% annually. Personally, I think Amazon is a worthwhile long-term investment as its current price.
2. Palantir Technologies
Palantir reported reasonably good financial results in the fourth quarter, beating expectations on the top line and meeting expectations on the bottom line. Its customer count increased 35% to 497 and the average existing customer spent 8% more. In turn, revenue rose 20% to $608 million, reflecting 32% growth in commercial sales and 11% growth in government sales. Non-GAAP net income doubled to reach $0.08 per diluted share.
CEO Alex Karp commented on Palantir's AI ambitions in his annual sharholder letter. "Every part of our organization is focused on the rollout of our Artificial Intelligence Platform (AIP), which has gone from prototype to product in months. And our momentum with AIP is now significantly contributing to new revenue and new customers," he wrote. AIP brings support for large language models to Palantir's commercial platform, Foundry.
To elaborate, Palantir builds software that helps businesses integrate and analyze data, develop and manage machine learning (ML) models, and build applications that improve decision-making. Forrester Research has recognized Palantir's Foundry as a leading AI/ML platform. AIP enhances Foundry, such that clients can develop and utilize generative AI to improve business outcomes. For instance, one of the largest U.S. healthcare organizations is using AIP to generate shift schedules that consider employee preferences, decision costs, and demand predictions.
In other news, the U.S. Army recently selected Palantir to build its Titan ground station system, which uses AI/ML to rapidly process data received from sensors placed in terrestrial, aerial, high altitude, and extraterrestrial locations. The 24-month contract is valued at $178 million, so it will not significantly move the needle for Palantir, but it does highlight its versatility and the contract could lead to further deals with the U.S. government.
Going forward, the data analytics market is forecasted to grow at 27% annually through 2030. While I doubt Palantir will match that pace given its past performance and small customer base, the tailwind still has positive implications for the company. Wall Street expects Palantir to grow sales at 21% annually over the next five years.
In that context, its current valuation of 23.5 time sales looks expensive, especially when the three-year average is 17.8 times sales. Also noteworthy, Palantir currently carries a consensus sell rating among Wall Street analysts, and the stock bears a median price target of $20.50 per share, which implies 10% downside from its current price of $22.80 per share. I would steer clear of Palantir until the stock trade at a more reasonable valuation.
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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. Trevor Jennewine has positions in Amazon, Nvidia, and Palantir Technologies. The Motley Fool has positions in and recommends Amazon, Goldman Sachs Group, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
