Ken Mahoney (CEO of Mahoney Asset Management, Financial expert on Bloomberg, CNBC & Fox Business Network)
The current boom of AI draws parallels to the beginning of the internet explosion in the late 90s into the early 2000s. We didn’t know where it was going exactly or what it would be capable of, but we knew it would effect our lives to some degree – and here we are today, as the internet is capable of doing things some thought was not possible.
We are presented with the same situation a couple decades later as AI has emerged and again we know it will play a role in many facets of our lives, but the question is how much? It also ponders the question which businesses and industries will be positively or negatively affected by AI? It certainly has taken the stock market by storm and is said to be a $1 trillion opportunity over the next decade. The market is certainly trying to price in that possibility.
There are companies that clearly will benefit and already have AI vertically integrated into their business models already. The first that come to mind are Microsoft, Google and Nvidia. This reminds us of a time where all the talk was cloud and who would be the winners there, and subsequently it was Amazon, Microsoft and Google. So here we are again and we think it is possible to pinpoint the potential winners.
Looking at Nvidia, their GPUs will stay in very high demand as they are needed for AI to power all different iterations of generative AI and other uses of it. Researchers estimate that 30,000 Nvidia A100 GPUs are needed to power ChatGPT alone which will be a significant revenue driver going forward.
It is even said that AI can help them to potentially improve how they design their GPU’s as well, and their chief technology officer is all in on AI, looking to further research in that space. In their earnings report from Q4 of 2022, they mentioned ‘AI’ over 100 times, as they clearly see this as the next pivot point in their business expansion and are great executors of what they set out to do as we have seen in the past, and the market also sees this clearly.
Nvidia’s massive run un the market is most likely reflected by the future growth of AI, with a very lofty P/E and price to sales at the moment, but that is the market pricing in that growth. With their GPU’s evolving and staying in high demand over the coming years, the market very clearly sees who will be at the forefront of this. Advanced Micro Devices and other chip makers are certainly in the race, but the market is clearly seeing Nvidia as the main leader so far.
So we know Nvidia is a major player here, but the other two who are battling it out as mentioned are Microsoft and Google. It seems at the moment, the consensus among analysts is that Microsoft has the upper hand in companies that are developing and supporting AI. They are challenging Google as the top search engine goliath as ChatGPT is integrated into Bing.
Microsoft officials even came out and said they want to move swiftly and have poured billions into research and development, stating at their AI launch event that:
“the race starts today, and we’re going to move and move fast.”
In their more recent earnings reports, Microsoft disappointed investors as they aren’t pushing on the gas as hard as they initially thought they would while Google is.
Another potential future growth story revolving around AI is Palantir. Palantir reports after the close on Monday after having made a tremendous run here this year, up some 190% year to date. The consensus estimate is $530.2 million which would be indicative of 12% YOY revenue growth, and the consensus is at 5 cents per share in terms of earnings.
As far as technicals go, this stock looks like it bottomed in the 8-10 range and has took off from there. It has continued to perform well amongst some broader market distribution days as all eyes really are on this upcoming report. The way we see it is that this is like their actual IPO period, as it did go public initially in 2020 around $7 per share, and ran to a high of $45 in the raging bull market/0 interest rate environment.
Now that there has been the huge washout since then and it traded back around that level and now they are going to be net profitable this year on top of the AI theme, it definitely has our attention. When you zoom out on the weekly chart, you see a whole lot of high volume buying and that institutional ownership increasing steadily, and now institutions around 35% of the float.
Despite the macroeconomic challenges in Q1, the company managed to increase its customer count by 41% Y/Y and closed 64 deals that were worth at least $1 million each. This has helped to improve the overall sales as Palantir’s revenue of $525.19 million during the quarter was up 17.8% Y/Y and above the estimates by $19.25 million.
At the same time, Q1 has also become the second profitable quarter in a row and the management expects this trend to continue for the rest of the year. What also is favorable for this company is that they have a debt free balance sheet, plenty of free cash flow and of course that AI tailwind.
To add to this, Wedbush analyst Dan Ives who we follow came out last week with the bold claim the Palantir is going to be the ‘Messi of AI’, having built an AI fortress and that many investors are missing out on how useful this business could be to others, and that 8-10% of enterprise budgets will be spent on AI next year giving them further opportunity to grow.
There are bold predictions that AI is going to be a $1 trillion market opportunity and what people may forget is that Palantir has been at this for 20 years, while most of these other companies, while they are well established, have only just began getting involved in this space.
We feel that the growth story is far from over as they continue to scoop up government contracts and also get involved with more commercial businesses. AI is and will be a huge part of everything we do and more and more companies are going to have to optimize around this, and they will be at the forefront of that we’d like to think.
We will listen closely to certain remarks the CEO Alex Karp makes during the earnings call and want to hear a continued more upbeat tone in his statements. Karp recently said,
“The depth of engagement with and demand for our new Artificial Intelligence Platform (AIP) is without precedent.”
“We are currently mobilizing our company and sales teams in order to convert this organic and inbound interest into an expansion of our reach within the market. The goal of AIP is to blend the machine learning technologies of existing PLTR technologies with large language models, coexisting in current PLTR platforms, helping businesses and governments make more data-driven decisions and further optimize processes.”
So as investors, we want to see this backed up by the numbers and continued contracts coming their way from the government and continue to expand doing business with commercial businesses as well. We want to hear strong guidance from the management team that reinforces the bullish thesis as well.
With that being said, there are definitely risks having it valued at $40 billion, while its peer group average is much lower in market cap, and the company most similar to Palantir being Booz Allen who is valued at $16 billion. However, we also have to remember that the market wants to price this for the future, similar to what has gone on with NVDA this year.
A lot of value investors always miss out on the moves because they are too focused on valuation, and we don’t want to be stuck in that boat where you won’t buy a stock because of your opinion that its valued too high. That is how many missed out on the massive tech runs we have all seen in the past (AAPL, TSLA, NVDA etc.)
So we aren’t particularly P/E or P/Sales type of investors, but we do have to realize that this stock is coming in hot into earnings. The other issue that we aren’t too fond of is that they have 2.1 billion shares outstanding, so it would be nice to hear at some point going forward that they intend to buy back stock as their business continues to grow.