Top 3 AI Stocks to Buy Today? (PLTR added to the S+P 500)

In the rapidly growing world of AI, Nvidia has been the go-to stock for investors. But can other AI stocks compete and potentially surpass Nvidia in the next 10-20 years? Today, we’re taking a deep dive into three AI-focused companies: Palantir, Qualys, and Fortinet. Let’s see what the data says, and whether these companies have the potential to outpace Nvidia's growth.

1. Palantir (PLTR)

Palantir is a stock we’ve discussed extensively, especially back when it was riding high at $45 per share in early 2021. But as quickly as it rose, it fell—dropping to a low of $5.83 before surging again, now trading at around $31 per share. Currently, Palantir is up a staggering 90% year-to-date and 105% over the past year.

The key to Palantir is its free cash flow, which is notably stronger than its net income. In previous discussions, we've pointed out some manipulation in their net income numbers, yet their free cash flow remains impressive. In 2022, they recorded $700 million in free cash flow and maintain a healthy balance sheet with a $76 billion market cap. However, the current price-to-free cash flow ratio stands at 110, which may be a tough pill for some investors to swallow.

Revenue Growth and Margins: 

Palantir’s projected revenue growth is around 20% per year for the next five years, with gross margins sitting at an impressive 81%. Their future looks bright, but with the stock currently trading at 100 times free cash flow, investors must weigh the potential against this high valuation.

Stock Analyzer Tool Results for Palantir:

When using our stock analyzer tool, I estimated a revenue growth of 8%, 16%, and 24% for the next decade. I kept profit margins between 15% and 35%, and free cash flow margins between 20% and 40%. After inputting my desired 9% return, I received the following valuation ranges:

• Low Price: $3.50 to $4.50
• High Price: $40 to $42
• Mid-range Price: $7

Given its solid balance sheet, it’s safe to add about 10% to those valuations. While Palantir has shown remarkable growth, the 100 times free cash flow valuation is still hard to ignore.

2. Qualys (QLYS)

Another cybersecurity giant, Qualys, hit an all-time high of $206 in December but has since fallen to around $122. Despite the dip, this company boasts more free cash flow than earnings and maintains a strong balance sheet, much like Palantir.

What stands out with Qualys is its return on invested capital (ROIC), which has averaged 26% over the past five years and is currently at 30%. These are exceptional numbers, particularly given the company’s modest market cap of $4.7 billion.

Growth and Margins:

Like Palantir, Qualys has a gross margin of 81%, and analysts predict its earnings per share (EPS) will grow from $5.37 to $9.42 by 2028. Revenue growth is expected to hover around 9% to 15% annually. This kind of growth potential combined with a smaller market cap means the upside could be significant.

Stock Analyzer Tool Results for Qualys:

For Qualys, I projected revenue growth between 5%, 8%, and 11% for the next decade, alongside a profit margin of 25% to 31% and free cash flow margins of 40% to 48%. Here's the valuation range I got:

• Low Price: $110
• High Price: $260
• Mid-range Price: $170

At its current price, the potential return is around 133%, making Qualys an attractive prospect for long-term investors. Given its smaller size compared to giants like Nvidia, it has the ability to grow much faster.

3. Fortinet (FTNT)

Fortinet sits between Palantir and Qualys in terms of size, with a market cap of $59 billion. While its balance sheet isn’t as robust as the others, with $63 billion in enterprise value, it still has strong fundamentals.

What really caught our eye was the ROIC, which came in at a whopping 81%. This is the highest we’ve seen, which signifies that Fortinet is incredibly efficient at generating returns from its investments.

Stock Analyzer Tool Results for Fortinet:

I projected revenue growth of 6%, 10%, and 14%, along with profit margins of 15% to 25% and free cash flow margins of 27% to 37%. Using my stock analyzer, here’s what I found:

• Low Price: $20 to $37
• High Price: $80 to $120
• Mid-range Price: $42 to $67

At its current price, Fortinet could potentially deliver strong returns if it continues to execute well. However, at this size, the question remains: can it grow enough to deliver the kind of returns investors are hoping for?

Conclusion

In comparing these three stocks to Nvidia, it’s clear that they each have their strengths and weaknesses. Palantir has the potential for explosive growth but trades at a steep valuation. Qualys offers strong returns on invested capital and is the smallest of the three, meaning it could grow the fastest. Fortinet, with its stellar ROIC, might also be worth keeping an eye on.

As always, when evaluating stocks, it’s important to do your due diligence and factor in your risk tolerance. For those who want to dive deeper into these stocks and more, we encourage you to join our Everything Money community, where we have detailed discussions on all aspects of investing, from AI stocks to real estate.

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