2 Artificial Intelligence (AI) Stocks Offering Real-World Value That Will Remain Strong for Decades

The tech-heavy Nasdaq index recently hit new highs, ushering in a new bull market. Even after several weeks, Invesco QQQ TrustThe stock price, which tracks the Nasdaq index, is up 63% since the beginning of 2023 and is just 2.5% off its new high.

The rally is driven by investors seeking a piece of the artificial intelligence (AI) boom and microsoft and Nvidia.

QQQ data by YCharts.

These stocks trade at nosebleed valuations and speculative names such as: Soundhound AI Many investors believe that the market is overvalued, perhaps even in the midst of a frightening bubble. If you’re wondering how to invest for the long term, one option is to focus on stocks that generate a lot of free cash flow (FCF). FCF is the cash that remains after paying operating expenses and equipment.

Companies that make profits in this way build value for their shareholders. The following two are great examples.

What does Arm Holdings do?

arm holdings (arm 1.73%) is important to the semiconductor market, but does not produce chips. Arm designs the architecture of the chip. License it to other companies (such as Nvidia). Amazon, apple, and more), customize it to suit your needs and receive royalty payments for each unit sold. As of the third quarter of 2024, 280 billion products equipped with Arm-designed chips have been sold. 99% of his smartphones have central processing units developed by Arm, so he probably uses them every day.

Arm’s products are also used in the automotive industry, data centers, and the Internet of Things (IoT). The IoT market covers all types of devices that connect to the internet, such as smart home appliances, security cameras, and drones. The market is huge and growing.

Many electric, self-driving, or advanced driver assistance features (such as lane control and collision warning) use Arm chip designs.

Their third quarter results excited Wall Street. Revenues increased 14% year-on-year (YOY) to $824 million, while operating income increased from $244 million to $1.9 million, primarily due to increased stock compensation associated with the listing. decreased to $34 million. However, cash flow, market share, and backlog were outstanding.

Arm reported $251 million in FCF. This means that 30 cents of every dollar was converted into cash. And, as shown below, the market share he says jumped to 51%.

Source: arm

This is huge because the company’s royalties generate recurring sales. Finally, Arm reported that his remaining performance obligations (revenue recognized in future periods) were $2.4 billion, an increase of 38% year over year.

This stock is difficult to value for two reasons. One is that there are no comparable companies, and the company has only a short history since going public. The stock price soared after the announcement of financial results, but has since fallen slightly. Values ​​are difficult to assess, so investors should consider using dollar-cost averaging or buying stocks over several periods to take advantage of dips.

Is Palantir stock a good investment right now?

Palantir Technologies (PLTR -0.33%) The company has proven its naysayers wrong over the past year by growing profitably and commercially. The company has a strong base with many government customers (Department of Defense), but needs to gain traction in other areas as well.

There is also criticism that the company is not making a profit. The company silenced those doubts with four consecutive quarters of profit and commercial (non-government) sales up 20% in fiscal 2023 and 32% in the fourth quarter. The number of customers has also increased significantly, as shown below.

Source: Palantir.

Palantir’s software helps customers analyze data from various sources to streamline operations and make better decisions. Its new Artificial Intelligence Platform (AIP) is designed for the enterprise and defense sectors.

For example, a large distribution company can learn how a significant weather event will affect a particular region. Through AIP, users can determine which distribution centers may be affected, backlog and revenue impact, optimal secondary routes, and cost impact. Distributors can use the results to make decisions that are best for their customers and their bottom line.

As you can see below, Palantir’s sales and cash flow are improving.

PLTR Revenue (TTM) data by YCharts. TTM = trailing 12 months.

Most of its revenue is recurring, so an increase in customer numbers means growth is likely to continue. Palantir has a fortress balance sheet with $3.7 billion in cash and investments and no long-term debt.

The company’s stock trades at a price-to-sales (P/S) ratio of 24 times, which is not cheap, but is in line with other growth technology companies, including: cloud strike (25P/S) and cloudflare (24P/S).

Arm Holdings and Palantir are profitable, cash-flow positive companies that make solid long-term investments and look like great stocks to buy on the spur of the moment.