Artificial intelligence (AI) advances continue to transform the technology industry. Its ability to take on tasks that previously required human intervention holds the potential to change the world while it benefits the stocks that put it to effective use.
Moreover, this is an industry with enough variation and choices to allow potential to profit for both conservative and risk-tolerant investors. Those looking for a lower risk may gravitate to AI stocks like International Business Machines (IBM 1.85%)while those looking for more growth potential (as well as somewhat higher risk) might consider Palantir (PLTR -1.86%). Let’s find out a bit more about these two AI stocks you might want to consider buying and holding over the next decade.
IBM has redefined itself several times since its founding in 1911. It got involved in research on AI decades ago. One of its more notable AI-driven coups was when its supercomputer Deep Blue defeated chess champion Garry Kasparov in 1997.
More recently, IBM Watson has jumped to the forefront of its AI efforts, applying this technology to enhance human intelligence. Watson helps its users predict future occurrences, optimize tasks, and assist users with time management.
With these capabilities, Watson attracted clients from numerous industries ranging from finance to healthcare to supply chain. The technology attracted 13 of the 14 top systems integrators and 70% of global banking institutions. IDC also ranked IBM No. 1 for AI software platform, taking almost 14% market share in 2020, a 47% increase year over year.
Moreover, IBM stock is an excellent choice for income investors wanting to invest in AI. Its annual dividend of $6.60 per share offers a cash yield of 4.9%. Also, 27 straight years of increases have given IBM Dividend Aristocrat status.
It can probably afford to maintain the payout and annual increases. It reported $7.4 billion in free cash flow over the last 12 months, enough to cover $5.9 billion in dividend costs. And this came at a time when the cost of spinning off Kyndryl weighed on free cash flow. Now, with the spinoff behind the company, free cash flows should improve as it finishes paying the costs related to the separation.
Furthermore, analysts project a net income of $9.11 per share. At current prices, it sells for around 15 times 2022 earnings, a level that affords a generous, rising dividend at a reasonable price.
Likewise, smaller growth-oriented companies like Palantir also thrive due to AI. Palantir utilizes AI to analyze data and recommend decisions. For this reason, the company does not have a direct competitor.
Its systems operate by utilizing Palantir Apollo, a package that facilitates a continuous delivery system and automated updates and configuration. Apollo supports Gotham, its software designed for national defense and law enforcement purposes. It also bolsters Foundry, a software package designed to capitalize on analytical needs in a business environment.
Palantir seeks to utilize AI and machine learning (ML) in these software packages. Not only does it rely on AI for one-off analyses, but it also builds models that can improve using feedback and decisions from users as an end-to-end operation.
According to CEO Alex Karp, Palantir generated $1.4 billion in AI software sales in 2021. This beat out Microsoft, IBM, and other large competitors. On this basis, the company seeks to spearhead the “next generation” of AI. Karp did not elaborate on what that would entail, a point that may not sit well with more conservative investors.
Nevertheless, it grew its revenue by 26% year over year in the second quarter of 2022, slightly falling short of Karp’s revenue growth target of 30% for the next three years. Additionally, it reported a significant net loss and will likely not turn profitable for years.
Still, the price-to-sales ratio of 9 is near a record low for the stock. Moreover, the current price is more than an 80% discount from its all-time high in early 2021.
That lower price does not make Palantir a low-risk stock, and investors need to understand the bull vs. bear case well. However, patient investors willing to take a chance on the next generation of AI could earn outsized returns over the next decade if Palantir succeeds in transforming its industry.
Will Healy has positions in Palantir Technologies Inc. The Motley Fool has positions in and recommends Microsoft and Palantir Technologies Inc. The Motley Fool has a disclosure policy.