Palantir and IBM Look Poised to Ride the Pentagon's AI Spending Wave

Key Points

• Palantir's Artificial Intelligence Platform (AIP) makes its products even more useful.

• IBM's Red Hat hybrid cloud helps the military stay connected and its data secure.

• 10 stocks we like better than Palantir Technologies ›

The rise of artificial intelligence (AI) has been one of the biggest stories on Wall Street for the last two years, as companies are racing to incorporate AI into their platforms to offer new products and features, and make processes run more efficiently.

The federal government is capitalizing on AI too, including at the Department of Defense, the biggest department in the U.S. government. Just last month, the Pentagon moved its Chief Digital and Artificial Intelligence Office under the Office of the Undersecretary of Defense for Research and Engineering as part of its effort to "become an AI-first enterprise, one that rapidly adopts cutting-edge commercial AI technologies, exploits data at scale to generate operational advantage, and leads the discovery of new ways to fight and win."

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There's an enormous opportunity for companies and investors to capitalize on the government's embrace of AI. The Pentagon agreed this month to a $100 million ceiling contract with Scale AI, in which the data labeling company will make its platform available to the Defense Department. And the Trump administration has expressed a desire to increase its military spending.

For investors, two of the best opportunities to capitalize on these tailwinds are Palantir Technologies (NASDAQ: PLTR) and International Business Machines (NYSE: IBM). Here's why I like both of these names right now.

Image source: Getty Images.

Palantir Technologies

Palantir is more than just the most compelling AI company that's working with the federal government these days. In my opinion, it's the ultimate growth stock, with gains of 2,300% in the last three years. Had you invested $10,000 in Palantir then, you'd be sitting on $240,000 now.

Palantir is a data mining company that pools information from countless sources, including military satellites, in order to help intelligence agencies and the military analyze, predict, and make real-time decisions. It's incredibly useful for miliary commanders in a battlefield situation, or in order to figure out where an adversary's assets are located.

Its Artificial Intelligence Platform (AIP) makes Palantir's products even more useful, as users can post detailed prompts and get quick answers to queries, greatly reducing the time needed to train new users.

In the second quarter, Palantir posted its first-ever quarter with $1 billion in revenue, an increase of 48% from a year ago. The U.S. government remains Palantir's biggest client, growing 53% from a year ago.

Palantir's position in the AI space is unparalleled, which is why I'm not terribly concerned with the stock's overloaded valuation, including its price-to-sales ratio of 131. There is still a lot of momentum in Palantir stock, and I'm expecting the returns to continue for several more quarters at least.

International Business Machines

IBM is a blue chip computing company that's still turning heads. The company's AI offerings include its Red Hat hybrid cloud, which combines public and private clouds and on-premises infrastructure, so the Pentagon can decide how to best connect their teams and processes.

IBM also employs defense simulation analytics, which allow the military to experience real-time mission planning to improve analysis and situational awareness, and provides consulting services to modernize military units and incorporate AI.

Last year, IBM was awarded a $576 million, 10-year contract to produce commercial semiconductor technologies for military applications, and has a $275 million contract awarded in 2019 to develop semiconductor manufacturing at contracted fabrication plants for the military.

IBM's revenue in the second quarter was $17 billion, up 8% from a year ago, and profits were $10 billion, up 11% from last year.

Two companies to watch

While IBM is a legacy computing company and Palantir has been the flashy new name on Wall Street, both AI stocks are positioned to profit from the Pentagon's increasing embrace of technology. Artificial intelligence has proven to be an invaluable tool to help the military be more productive and to make life-or-death decisions in secure environments. I expect both companies to continue to grow their government portfolios in the AI space.

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Patrick Sanders has positions in Palantir Technologies. The Motley Fool has positions in and recommends International Business Machines and Palantir Technologies. The Motley Fool has a disclosure policy.