The S&P 500 has experienced an extraordinary bull run over the past 28 months, significantly driven by advancements in the artificial intelligence (AI) sector. Investor enthusiasm regarding the potential of AI technology to revolutionize virtually every industry has reached new heights. One company that stands out in this landscape is Palantir Technologies (PLTR), which has benefitted immensely from the surge in AI-related spending and investor interest.
Palantir Technologies specializes in helping both government agencies and business enterprises analyze the massive amounts of data they generate. By making data science tools more accessible to decision-makers, Palantir enables organizations to make informed choices. The central idea is that investing in Palantir's software can lead to rapid returns.
Traditionally focused on serving U.S. government entities and the military, Palantir's growth has accelerated, particularly among commercial clients, following the launch of its Artificial Intelligence Platform (AIP). Over the past two years, Palantir's revenues have surged by 50%. Remarkably, its stock price has skyrocketed by more than tenfold during the same timeframe, resulting in a market capitalization of $204 billion. This valuation comes despite a more than 30% decline from its peak earlier this month.
As high expectations are now factored into Palantir's stock price, any minor setback in financial performance could lead to further declines. Meanwhile, two other AI-focused stocks appear poised to surpass Palantir in value by 2026, making it essential for investors to stay informed.
Qualcomm (QCOM) is not the first semiconductor company that comes to mind when discussing artificial intelligence, as it does not manufacture GPUs or network switches like other prominent chipmakers. However, Qualcomm is set to play a vital role in the AI landscape in the coming years. The company operates two key segments: its high-margin licensing segment, QTL, which holds essential patents for wireless communication technologies, and its chip business, QCT.
Despite facing challenges due to Apple's move away from Qualcomm's patented technology—illustrated by the recent launch of the iPhone 16e, which utilizes Apple's in-house chips—Qualcomm's revenue largely depends on its QCT segment. This area is expected to receive a significant boost as more technology companies integrate AI processing power into devices like PCs, smartphones, and automotive applications.
The Snapdragon mobile system-on-chip line, Qualcomm's leading smartphone chip, has been adapted for various applications, including PCs and automotive systems. With consumers increasingly demanding smarter and more capable devices, Qualcomm has reported impressive sales growth, with QCT revenues increasing by 20% in the last fiscal quarter and earnings before taxes rising by 25%.
As developers create new AI software designed for devices like smartphones, the need for powerful processors will escalate. Qualcomm's stock currently trades at just 14.3 times expected forward earnings, presenting an excellent buying opportunity, particularly given the expected growth in AI demand. Historically, Qualcomm has traded at an average trailing price-to-earnings (P/E) ratio of around 18, which suggests a potential upside of 25% from current levels, potentially elevating its market cap to approximately $230 billion, surpassing Palantir's current valuation.
Adobe (ADBE) has invested heavily in artificial intelligence in recent years, although investor sentiment remains cautious regarding the impact of generative AI advancements on its core business. Many analysts fear that AI-powered creative tools might render Adobe's Creative Cloud applications obsolete. However, Adobe's competitive advantages remain robust, as its tools are industry standards that professionals are unlikely to abandon easily.
Businesses require deliverables in Adobe's file formats, and professionals are expected to be proficient in its software. Switching costs are significant, making it unlikely that many creatives will shift away from Adobe. Moreover, the creative capabilities enabled by generative AI could actually enhance Adobe's offerings, facilitating design creation for a broader audience. To capitalize on this trend, Adobe has embraced its Firefly AI model, integrating it into its entry-level Adobe Express software.
Management has reported strong user acquisition from Adobe Express, which could lead to increased adoption of its premium software offerings. Additionally, the company has raised prices, charging a premium for enhanced access to Firefly, which contributed to an 11% rise in annual recurring revenue for its digital media segment in 2024.
Another significant opportunity for Adobe lies in its marketing solutions business. The integration of AI into its marketing software could enhance ad campaigns by helping businesses analyze data and optimize their ad spending. Adobe's recent launch of GenStudio for Performance Marketing aims to tap into this vast market, with early responses indicating promising results. Currently, Adobe stock trades at less than 22 times analysts' projections for 2025 earnings, which is below its historical average, suggesting considerable upside potential. A 25% increase in share price could elevate its trailing P/E into the high 20s, reflecting a cautious yet optimistic outlook for future growth and pushing Adobe's valuation above $240 billion, exceeding Palantir's current market cap.
