Anticipated Outcome: Two Artificial Intelligence Shares will Exceed Palantir Technologies' Value by Year-End in 2025
Trending Tech Titans saw Palantir Technologies leading the charge in the S&P 500's (^GSPC 0.61%) ascent last year, with shares skyrocketing an impressive 340%. Valued at $163 billion as of January 20, 2023, this tech giant might hold the top spot, but industry heavyweights like Shopify ($134 billion) and Arista Networks ($150 billion) could challenge that position by 2025, according to certain analyst predictions:
- To surpass Palantir's market value, Shopify's stock would have to return at least 22%, setting its worth at $163 billion by 2025. Loop Capital's Anthony Chukumba predicts a share price of $140, implying a 36% upside from its current price of $103.
- Arista Networks would need a 9% increase in stock value to reach Palantir's market cap by 2025, with Golden Sachs' Mike Ng forecasting a target price of $135, signaling a 13% rise from its current price of $120.
Let's delve into these two potential challengers:
1. Shopify
In its Q3 earnings report, Shopify excelled, surpassing expectations on both revenue and earnings. With a 26% revenue increase to $2.1 billion, strong growth in both subscription software and merchant services, and a 46% boost in non-GAAP earnings, Shopify projected similar Q4 sales growth.
Shopify's central investment opportunity lies in its unmatched ability to streamline commerce across digital and physical channels. Merchants can manage their businesses from a single dashboard, integrating sales from various platforms, including websites, social media, online marketplaces, and physical stores. Shopify also provides corresponding services, such as payments, marketing, logistics, B2B commerce, and cross-border commerce tools.
In recognition of its e-commerce dominance, Shopify was named market leader by the IDC for mid-market businesses and praised as the B2B e-commerce leader by Forrester Research. With the B2B commerce market three times larger and growing nearly twice as fast as retail e-commerce, Shopify is perfectly positioned to capitalize on this trend.
Investment analysts believe Shopify will significantly benefit from artificial intelligence. Shopify Magic, a suite of AI tools that aids merchants in customizing storefronts, generating product images, and writing product descriptions, is one example. Internally, Shopify uses AI to increase efficiency and will likely drive higher revenue growth at a faster rate than operational costs for the foreseeable future.
Forecasts predict Shopify's adjusted earnings growth of 25% annually through 2025. Despite what might appear as an expensive valuation of 90 times adjusted earnings, the robust growth in earnings and an average beat of 22% on the consensus estimate in the past four quarters suggest this valuation could be justified.
Anticipating a minimum 22% earnings growth year-over-year, Shopify could surpass Palantir's market cap in 2025, despite a slight reduction in the valuation multiple. With Loop Capital's target price of $140 per share, investors may consider beginning a small stake in Shopify.
2. Arista Networks
Arista reported superior Q3 financial results, exceeding estimates on both revenue and earnings. Strong demand for AI networking solutions and a 31% surge in non-GAAP earnings contributed to the reported revenue increase of 20% to $1.8 billion. Arista also indicated robust growth in the fourth quarter and beyond, anticipating 22% Q4 revenue growth and a 16% increase in 2025 revenue.
The investment value in Arista Networks hinges on its market dominance in high-speed Ethernet switches—the hardware that powers information flow through data centers. With a 43% share in the 100G, 200G, and 400G verticals—the fastest switches in wide use today—Arista has a sizable advantage over its competitors, including a fourfold share lead over Cisco.
Arista's software-centric strategy further strengthens its position. By utilizing the Extensible Operating System (EOS) across all hardware products, Arista simplifies network maintenance and provides a competitive edge over legacy vendors.
High-speed networking demand is projected to skyrocket fivefold between 2022 and 2027, driven by AI infrastructure buildouts in enterprises. With such robust growth in the market and Arista's EOS-powered dominance, Arista is well-positioned for success.
Analysts anticipate Arista's adjusted earnings growth of 12% annually through 2025, suggesting a pricey valuation of 56 times adjusted earnings. However, Arista's history of besting the consensus estimate by 14% on average in the last four quarters indicates growth potential. Maintaining this pattern, Arista has the chance to surpass Palantir's market valuation and see a decrease in valuation multiple by 2025.
With Goldman Sachs setting a target price of $135 per share, and Arista's clear growth prospects, investors may ponder buying a small stake in this stock.
Shopify's potential for growth in B2B commerce and the use of AI in its operations could attract investors looking to diversify their finance portfolios by investing in tech stocks. To achieve a market cap similar to Palantir's, Shopify needs to grow its earnings by at least 22% annually, which analysts believe is feasible given its robust growth and AI capabilities.
Arista's strong market position in high-speed Ethernet switches and its software-centric strategy make it an appealing investment option for those seeking to capitalize on the growing demand for AI infrastructure in enterprises. To surpass Palantir's market valuation by 2025, Arista needs to demonstrate an annual adjusted earnings growth of at least 12%, a target that Goldman Sachs analysts believe is achievable given Arista's historical performance.
