AI Stocks: Qualcomm and Adobe Set to Outperform Palantir
The S&P 500 has enjoyed a remarkable bull run over the past two-plus years, significantly fueled by the artificial intelligence (AI) industry. Recent advancements have ignited investor excitement about AI’s potential to transform nearly every sector of the economy. Amidst this boom, Palantir Technologies (PLTR) has emerged as one of the beneficiaries, offering data analytics solutions to government agencies and commercial enterprises.
Palantir’s Artificial Intelligence Platform (AIP) has accelerated its growth, particularly among commercial clients, with revenues increasing 50% over the last two years. However, its stock price has surged even more dramatically, increasing tenfold in the same period, leading to a $204 billion market cap even after a recent drop from its peak. This high valuation implies significant expectations, making even minor financial setbacks potentially damaging to the stock price. While Palantir has experienced substantial growth, two other AI stocks may surpass Palantir in value by 2026.
Qualcomm: The On-Device AI Powerhouse
Qualcomm (QCOM) is a semiconductor company that might not immediately spring to mind when pondering AI investments. Unlike companies specializing in GPUs or network switches, Qualcomm’s role in enabling AI on devices is becoming increasingly crucial.
Qualcomm’s business consists of two main segments: QTL (licensing) and QCT (chip business). The QTL segment holds key patents for wireless communication, including 3G, 4G, and 5G, earning royalties from device manufacturers. However, Qualcomm faces a headwind as Apple shifts towards using in-house designed chips; however, QCT, its chip business, offers significant growth potential, driven by the increasing integration of AI processing power in PCs, smartphones, and other devices.
Qualcomm’s Snapdragon mobile system-on-chip line is the leading smartphone chip for high-end Android devices, which Qualcomm has adapted for PCs and automotive applications. Strong sales growth stems from the demand for more capable devices and smart features in vehicles. In its last fiscal quarter, the QCT segment’s revenues increased by 20%, with pre-tax earnings increasing 25%. As software developers create new AI applications designed to run on devices, the demand for more powerful processors will escalate. Qualcomm’s stock currently trades at 14.3 times expected forward earnings a discount compared to its historical average. A potential price increase of 25% could push its market cap to approximately $230 billion, surpassing Palantir’s current value.
Adobe: Innovating with Generative AI
Adobe (ADBE) has invested heavily in artificial intelligence. Adobe addresses concerns about the impact of new generative AI tools on its business and highlights Adobe’s robust competitive advantage. This is due to its place as the standard for professional creative tools. The industry-leading tools ensure creative professionals will likely continue using Adobe’s tools.
Adobe’s Firefly AI model makes it easier for more people to create designs, images, or videos. Strong user acquisition from its entry-level Adobe Express software could lead to wider adoption of its premium software. Price increases for more Firefly access have also boosted revenue. For 2024, Adobe saw an 11% increase in annual recurring revenue for its digital media segment. The company’s marketing solutions business provides a potentially more significant AI opportunity. Adobe is looking to supercharge ad campaigns by helping businesses gather more data, analyze it, and optimize ad spending. Management has reported promising early responses to Adobe’s GenStudio for Performance Marketing.
Adobe’s stock trades for less than 22 times analysts’ expectations for 2025 earnings, a valuation below its historical average. A 25% increase in the share price could bring its trailing P/E into the high 20s, close to its historic average. The predicted growth would push Adobe’s valuation beyond $240 billion, exceeding Palantir’s current market cap.
