3 AI Software Stocks Worth Considering

The development of artificial intelligence (AI) has led to substantial revenue growth for hardware-centric companies, particularly Nvidia. However, the next significant phase of AI growth is anticipated to arise from the software realm, as businesses integrate AI into their operations.

This article highlights three stocks that are poised to benefit from the rising demand for AI software solutions.

1. Palantir Technologies

Among the most talked-about stocks in the AI sector is Palantir Technologies (PLTR). While many tech giants compete to develop premier AI models, Palantir is taking a distinct route. The company's management believes that AI models will eventually converge and become standardized.

Palantir's strategy is to establish itself as the operational backbone for organizations using AI by concentrating on its application and workflow components. It focuses on aligning data sets and models with real-world applications to assist clients in utilizing AI to address tangible issues.

To attract customers, Palantir conducts AI workshops, known as boot camps, showcasing how its platform can fulfill various business needs while providing training. This approach has successfully drawn in numerous U.S. commercial clients and increased revenue.

Looking ahead, Palantir aims to transition these commercial clients from trial phases to full-scale production, potentially accelerating its growth trajectory further. In addition to its commercial endeavors, the company stands to gain as its largest customer, the U.S. government, begins to adopt AI.

Despite its promising outlook, Palantir’s stock comes with a high valuation, currently trading at a price-to-sales (P/S) ratio of 41 based on 2025 analyst predictions. This figure is notably higher than past peak valuations for similar software-as-a-service (SaaS) stocks, indicating limited margin for error.

2. Microsoft

Microsoft (MSFT) was among the first major tech companies to dive into the AI landscape by significantly increasing its investment in OpenAI and forming a partnership with the startup. The company's cloud service, Azure, has particularly benefited, witnessing rapid growth as it aids clients in building their own AI models and tools like Copilots.

Beyond cloud computing, Microsoft has sizable opportunities within its software sector. GitHub, a platform that assists developers in creating code, has emerged as one of its fastest-growing software segments, especially since the introduction of GitHub AI Copilot, which aids programmers by suggesting code completions.

The most significant potential lies within its Microsoft 365 Copilots. These AI assistants can perform tasks like email prioritization, summarizing meeting notes, tracking task completion, sharing documents, and creating presentations using natural language inputs. Workers are still learning to harness this technology, which promises to enhance efficiency significantly.

The pricing for Microsoft 365 Copilots is approximately $30 per month for each enterprise user, providing a solid revenue stream. Last quarter, Microsoft noted that 70% of the Fortune 500 companies utilize Copilots, with considerable room for growth as more departments within these companies adopt the technology.

With a forward price-to-earnings (P/E) ratio of under 33 based on this fiscal year’s analyst estimates, Microsoft’s stock seems reasonably valued.

3. AppLovin

AppLovin (APP) has experienced a remarkable turnaround since launching its AI-driven adtech solution, Axon-2. This platform helps gaming app developers attract and better monetize users by employing predictive machine learning techniques.

Since the introduction of Axon-2 in the summer of 2023, AppLovin's software revenue has surged, including a 66% growth in this segment, reaching $835 million last quarter. Notably, the company's gross margins have improved significantly, with an impressive year-over-year increase of 820 basis points, now at 77.5%. This is a promising sign as rapid revenue growth correlates with increased profitability.

Moving forward, AppLovin anticipates consistent software platform revenue growth of 20% to 30% from gaming clients, attributing this success to the platform’s self-learning capabilities and market expansion. Essentially, the more the platform is utilized, the more effective it becomes at targeting consumers.

The major growth opportunity for AppLovin lies in extending its services beyond gaming companies. The company has already pilot-tested Axon-2 with e-commerce clients and believes that this segment could significantly contribute to revenue by 2025 if the trials succeed.

Although AppLovin's forward P/E stands at over 40.5 concerning 2025 analyst forecasts, its price/earnings-to-growth (PEG) ratio is only 0.65. A PEG ratio below 1 is often considered an indicator of undervaluation, especially for growth stocks which typically have higher multiples.

As companies continue to explore and implement AI technology, these three stocks—Palantir Technologies, Microsoft, and AppLovin—represent potential opportunities for investors looking to capitalize on the AI software boom.

AI, Investing, Stocks