Since the pandemic of 2020, the U.S. equity market has been exceptionally volatile, alternating between bull and bear rallies. Even so, the stock market has continued to generate wealth for the long-term investor. If you had invested $1,000 in the S&P 500 index on Jan. 1, 2019, your investment would have grown annually at 15% (with dividends reinvested) to $2,034.90 at the end of January 2024.
The S&P 500 index has attained multiple record highs so far in 2024, yet there are still attractive investment opportunities available for the persistent investor. With artificial intelligence (AI) emerging as a hot investment theme of the decade, investors can consider picking a small stake in Palantir Technologies (PLTR -6.12%) and Super Micro Computer (SMCI -1.30%).
Here's why these stocks are smart buys now.
Palantir
Shares of leading data mining software and machine learning specialist Palantir have gained nearly 50% since the company came out with a stellar fourth-quarter earnings report on Feb. 5. Revenue surged by 20% year over year to $608.4 million, driven mainly by the 32% year-over-year increase in the company's commercial business revenue. The company's government revenue, however, was up by only 11% year over year to $324 million.
While the government business currently accounts for 53% of Palantir's total revenue, this revenue mix will soon change in favor of the commercial clients. Since the latter business involves higher pricing flexibility and lower regulatory burdens, this shift may help boost Palantir's margins. Palantir also reported its fifth consecutive quarter of generally accepted accounting principles (GAAP) profitability in the fourth quarter.
Palantir attributes the rapid increase in new customers as well as expansion within existing customers mainly to the increasing adoption of the recently launched AIP (Artificial Intelligence Platform).
AIP, a generative artificial intelligence-powered software suite, helps integrate contextually relevant data across multiple sources such as video conferences, incident response calls, slack rooms, PDFs, images, video, and audio and then uses large language models and ontology to extract valuable insights from this unstructured data.
This helps enhance enterprise decision-making by including new data in an operationally relevant context. AIP has been instrumental in enabling the company to close 103 deals with annual recurring revenue of over $1 million in the fourth quarter. Hence, AIP is resulting in a significant expansion of the company's target addressable market.
Palantir's Bootcamp-based go-to-market strategy with current and prospective customers has also played a pivotal role in driving the adoption of AIP. By demonstrating the value and capabilities of AIP in its Bootcamps, the company has successfully compressed the sales cycles and acquired new customers -- rapidly converting engagements into paying customers.
Hence, considering the company's solid financials, the rapid pace of commercial customer acquisition, and the increasing adoption of AIP, long-term investors can benefit dramatically in the coming years.
Super Micro Computer
Super Micro Computer is a provider of AI-optimized high-end servers and rack-scale total IT solutions -- including services, networking, security, storage, and software features -- all delivered as a single unit. While competitors focus on mass-produced, highly commoditized low and midrange servers, Supermicro (as it's commonly known) has differentiated itself by providing a "building block" or modular architecture.
This has enabled the company to offer highly customizable and scalable solutions to customers of different sizes, across industry verticals. The modular architecture also ensures that the company can quickly integrate new technologies into its solutions -- enabling it to launch these cutting-edge solutions in the market ahead of the competition.
As a result, Supermicro's high-performance solutions are now used by over 1,000 clients across more than 100 countries in areas such as enterprise, cloud, 5G telecommunications, edge IT infrastructure, AI, and the metaverse.
Supermicro's longstanding partnership with Nvidia has also been a solid positive for the company. By gaining early access to cutting-edge H100 AI chips, the company has been very successful in capitalizing on the generative AI market's explosive growth.
The company is also investing to more than double the number of its AI offerings using upcoming chips such as Nvidia's H200 and B100 GPUs and Grace Hopper Superchip as well as Advanced Micro Devices'MI300X/MI300A accelerators and Intel's Gaudi 2 and Gaudi 3 accelerators.
Supermicro's AI-optimized servers and total IT rack-scale solutions are being used extensively for accelerated computing in data centers. The company's enterprise liquid-cooling technology is also being adopted rapidly by data centers to improve the performance, reliability, and efficiency of their power-intensive AI platforms.
In its fiscal 2024's second quarter (ended Dec. 31, 2023), the company earned over half of its revenue, or more than $1.8 billion, from the sale of AI servers and rack-scale total IT solutions. According to Global Market Insights, the AI server market is expected to grow from $38.3 billion in 2023 to $177.4 billion in 2032. Being the third-largest server player in the world with a 5% market share, the company is well-positioned to capitalize on the burgeoning demand in the AI server market.
Lastly, S&P Global just announced that Supermicro will join the benchmark S&P 500. This news propelled the stock higher, bringing its total gains in the past year to 934%. Yet, despite that stunning performance, the stock's valuation still makes fairly good sense. The shares are trading at about 8 times trailing-12-month sales, which is still within reason for a company expected to grow its revenue by 103% year over year in fiscal 2024 (ending June 30, 2024). Considering all these factors, Supermicro remains an excellent buy.
Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Palantir Technologies. The Motley Fool recommends Intel and Super Micro Computer and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
