The overheated technology sector may be part of the reason why the broad stock market looks so expensive right now. Though skeptics would argue that above-average price-to-earnings (P/E) multiples could give way to lower returns in the near future, I’d argue that it’s really tough to forecast the impact of artificial intelligence (AI) on corporate earnings and the economy. Indeed, AI is a revolutionary technology, just as the internet was, but the big question is the timeframe in which AI can become a major money maker.
Going into the new year, I believe the big story is whether the tech giants will keep their foot on the AI gas or take more of an efficiency focus. Either way, both scenarios could be incredibly lucrative for investors, even at these levels. In this piece, we’ll look over three two stocks that can prove they’re more than deserving of their premium price tags.
Key Points About This Article
- Apple and Palantir have what it takes to cash in on the AI boom.
- Higher valuation metrics may be supported by their impressive medium-term growth trajectories.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
Apple
The big story over the past week was Warren Buffett’s latest continued selling of shares of Apple (NASDAQ:AAPL). To many Buffett followers, recent net selling of stocks may be a sign that extended market multiples deter the Oracle of Omaha. Combined with a lack of Berkshire Hathaway (NYSE:BRK-B) buybacks, it seems Buffett is no fan of the pitches thrown in his direction.
Either way, I view AAPL stock as a compelling value despite its historically swollen 36.7 times trailing price-to-earnings (P/E) multiple. Unlike many other stocks that have gained ground primarily through multiple expansions, Apple has a compelling catalyst with Apple Intelligence that could power iPhone growth for the next few years.
Though initial impressions of Apple Intelligence haven’t been met with awe, I do think the product offering is just the beginning of Apple’s slow-and-steady walk into the AI race. Indeed, Apple Intelligence, as it exists in iOS 18.1, seems more like an appetizer to enjoy before the main course arrives.
Despite relatively modest (but still somewhat robust) iPhone demand in the latest quarter, Deepwater Asset Management’s Gene Munster thinks an iPhone supercycle is still on the table and could come into effect in June 2025. That’s a bold call and one that makes sense since the best of Apple Intelligence has still yet to come.
Additionally, Apple’s reported interest in smart glasses could mark the next big device category that drives growth for the Cupertino-based giant.
Palantir
Palantir (NYSE:PLTR) stock found itself up more than 208% following its latest quarterly blowout. Undoubtedly, Alex Karp seems to be taking a different approach in this AI race.
As a part of the firm’s latest conference call, Karp boldly stated that large language models (LLMs) are commodities and that “how you manage the commodity” was more important. Indeed, Palantir’s AI Platform (AIP) is a fantastic foundation to help empower firms to get the most out of AI.
Arguably, Palantir could lead the charge as investors start valuing AI return on investment (ROI) over rampant spending for the promise of growth in the future. Indeed, it’s hard not to love Palantir after its impressive quarterly showing, even if the valuation is getting a tad lofty.
At more than 101 times forward price-to-earnings (P/E) and over 37 times price-to-sales (P/S), PLTR stock could get cut in half and still look overvalued. That said, the company has a front-row seat to the AI software boom, with “unwavering demand” for its products. And it doesn’t look like the firm is about to surrender its seat anytime soon as AI-related growth looks to accelerate into the new year.
Personally, I think AIP has more room to run as Palantir continues defying the odds. While I wouldn’t build a position that is too large after the latest post-earnings surge, I would think about nibbling into a larger position after the latest upside pop if you’re in the market for best-in-breed AI growth.
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