Stock Market Rally Is Coming: 1 Artificial Intelligence (AI) Growth Stock to Buy Now and 1 to Avoid, According to Wall Street

Stock Market Rally Is Coming: 1 Artificial Intelligence (AI) Growth Stock to Buy Now and 1 to Avoid, According to Wall Street

Wall Street expects strong earnings to send the stock market higher. the Standard & Poor’s 500 It carries a consensus price target of 5.038, implying an upside of 14% over the next year. These bottom-up forecasts combine the average price targets for each stock in the index, blending more than 11,000 individual ratings, according to FactSet.

Any upward momentum in the market could be particularly evident in artificial intelligence (AI) stocks given the enthusiasm inspired by the technology. But investors need to pick and choose carefully. For example, Amazon (Amzn -1.78%) And Palantir Technologies (belter 0.05%) They are recognized leaders in certain parts of the AI ​​value chain, but Wall Street views the companies very differently.

Amazon has an average 12-month price target of $175 per share, which implies an upside of 22% from its current price. But Palantir has an average 12-month price target of $16 per share, which implies a 19% downside from its current price.

Read on to learn more about these AI growth stocks and find out why it’s best to buy one and avoid the other for now.

Stock to buy: Amazon

Amazon has been developing its artificial intelligence (AI) capabilities for more than two decades, and its strong presence in three large and growing markets — e-commerce, digital advertising, and cloud computing — creates a multitude of monetization opportunities. For this reason, analysts said… Morgan Stanley Look to Amazon as one of the few companies best positioned to benefit from AI-driven transformation.

E-Commerce: Amazon operates the world’s most visited online marketplace, and is expected to account for approximately 39% of online retail sales in North America and Western Europe this year. The company uses AI to help shoppers find products in its marketplace, but it also uses AI behind the scenes to improve inventory management and improve automated picking routes in fulfillment centers.

Digital advertising: Amazon accounts for three-quarters of all retail ad spending in the United States, and was recently named the world’s third-largest ad tech company by Ali Baba. Amazon recently launched an AI-powered image creation tool that simplifies the marketing content creation process. More broadly, success in retail means the company is uniquely positioned to provide marketers with shopper data to inform AI models and targeted ad content.

Cloud computing: Amazon Web Services (AWS) dominates the market for cloud infrastructure and platform services, and was recently recognized as a leader in cloud AI developer services. The company is turning to this advantage with two new products: Bedrock, which helps companies build generative AI applications, and CodeWhisperer, an AI-enabled coding companion that accelerates software development.

Going forward, online retail sales are expected to increase by 9% annually through 2028, while the advertising technology and cloud computing markets are expected to expand by 14% annually until 2030. These tailwinds should translate into lower revenue growth Amazon. Over the next five years.

In this context, its current valuation of 2.7 times sales seems reasonable, especially when the five-year average is 3.4 times sales. That’s why this AI stock is worth a buy.

Stock to avoid: Palantir Technologies

Palantir helps customers make sense of complex data through two core software platforms: Gotham was initially designed for government agencies, and Foundry was designed for commercial companies, though there is now some overlap. Both platforms are operating systems that integrate, analyze, and visualize data and connect it to workflows via applications that aid in decision making.

Palantir supports the development and optimization of simple analytical models, as well as more sophisticated AI models. Earlier this year, Dresner Advisory Services recognized the company as a leader in ModelOps, an AI model lifecycle management system. Dresner also recognized Palantir as a leader among AI, data science and machine learning platform vendors.

Palantir delivered a strong financial report in the third quarter, beating consensus estimates. Its customer count rose 34% to 453, revenue increased 17% to $558 million, and the company had GAAP net income of $72 million, compared to a loss of $124 million the year before. Investors have good reasons to expect similar momentum in the future.

The big data software market is expected to double 12% annually to $333 billion by 2027, but Palantir should outperform the broader industry given its strong presence among ModelOps and AI platform vendors. In fact, Morgan Stanley expects revenues to grow by 20% annually over the next five years.

However, I doubt whether Palantir can deliver market-beating returns from its current valuation. The stock trades at 20.6 times sales, which is a significant premium to the two-year average of 13.4 times sales, and the company generates revenue in a very concentrated way (due to declining customer numbers), which could become an issue if customers start leaving. To that end, I plan to avoid Palantir stock for now.

However, investors should keep this company on their watchlists. Wall Street may be bearish overall, but some strategists are downright optimistic. For example, Dan Ives of Wedbush Securities recently called Palantir “the gold standard in AI.” With praise like this, Palantir deserves further consideration.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Genuine holds positions at Amazon and Palantir Technologies. The Motley Fool has positions in and recommends Amazon and Palantir Technologies. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.

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