3 AI Software Stocks to Consider Buying

The expansion of artificial intelligence (AI) has marked the first significant wave in this technology sector, generating substantial revenue growth for firms such as Nvidia. However, the forthcoming wave of AI is anticipated to emerge within the software sector, as businesses increasingly integrate AI into their operations.

This article examines three stocks that could thrive from the rising trend in AI software.

1. Palantir Technologies

Among the most talked-about stocks in the AI realm is Palantir Technologies (PLTR). While many large tech corporations are competing to develop superior AI models, Palantir has adopted a distinct strategy. Leadership has expressed the belief that AI models may ultimately converge, leading to a commoditized market.

Rather than focusing solely on the models themselves, Palantir aspires to become the operational backbone for AI within organizations by emphasizing application and workflow layers of AI. By aligning data sets and models with their real-world applications, Palantir aims to assist clients in leveraging AI to tackle tangible challenges.

The company has garnered new clients via its AI workshops, known as boot camps. These sessions demonstrate the practical uses of its AI platform while also providing essential training. This strategy has resulted in a notable increase in its U.S. commercial clientele and revenue streams.

Looking ahead, the next growth impulse for Palantir will involve transitioning these commercial customers from initial proof-of-concept phases into full production. While Palantir's growth trajectory has been accelerating, this transition could further enhance its momentum. The business will also gain from its largest customer, the U.S. government, as it begins to adopt AI more broadly.

Despite its promising outlook, Palantir's stock trades at a high valuation, currently at a price-to-sales (P/S) ratio of 41 based on 2025 analysts' forecasts. This valuation is double the peak multiples seen in software-as-a-service (SaaS) companies some years ago for similar growth rates, indicating that Palantir must execute its strategy flawlessly.

2. Microsoft

Microsoft (MSFT) was among the earliest large tech entities to embrace AI, significantly boosting its investment in OpenAI and establishing a partnership with the AI startup. The most significant benefits have been observed in its cloud computing sector, Azure, which has expanded rapidly as it aids clients in developing their AI models and Copilots.

In addition to cloud services, Microsoft's software business holds significant potential. GitHub, a platform assisting developers in code creation, has rapidly grown since the launch of its GitHub AI Copilot, which provides coding suggestions and assistance.

The more substantial opportunity lies with its Microsoft 365 Copilots. These AI assistants perform a range of tasks, such as prioritizing and summarizing emails, tracking completed and outstanding tasks, sharing documents, generating PowerPoint presentations through natural language inputs, and even enabling Python programming directly in Excel via natural language commands. As employees become familiar with this technology, it promises to enhance productivity significantly.

With a subscription cost of $30 per month for each enterprise user, this service represents a lucrative revenue avenue for Microsoft. The company reported that 70% of the Fortune 500 companies have adopted Copilots, indicating substantial opportunity for further growth within these existing customers as more departments integrate this technology.

Currently trading at a forward price-to-earnings (P/E) ratio of under 33 based on fiscal year estimates, Microsoft shares appear to be reasonably priced.

3. AppLovin

Despite its unusual name, AppLovin (APP) has seen a transformation since rolling out its AI-driven adtech solution, Axon-2. This software platform is utilized by gaming app developers to attract and more effectively monetize users, using predictive machine learning to enhance customer experience.

Since the introduction of Axon-2 in the summer of 2023, AppLovin has experienced dramatic revenue growth in its software segment, with a remarkable 66% increase to $835 million last quarter. Additionally, the company's gross margins have improved significantly, rising by an impressive 820 basis points year over year to 77.5%. This is encouraging, as it signifies not only revenue growth but also an increase in overall profitability.

AppLovin anticipates steady revenue growth of 20% to 30% from its software platform through self-learning and market expansion among gaming clients. As the platform gains more usage, it learns and enhances its capabilities in targeting gamers effectively.

Moreover, AppLovin has opportunities to extend its offering beyond its core gaming clientele, having already piloted Axon-2 with e-commerce businesses. The company believes this market could become a significant contributor by 2025, presenting a considerable growth avenue.

Although AppLovin's forward P/E ratio exceeds 40.5 based on 2025 estimates, its price/earnings-to-growth (PEG) ratio stands at 0.65, which is generally considered undervalued, especially for a growth stock.

AI, Stocks, Software