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2 No-brainer Artificial Intelligence (ai) Stocks To Buy With $260 In February
Artificial intelligence (AI) has been one of the hottest segments of the stock market for the last two years. Many investors are focused on pick-and-shovel plays like chip supplier Nvidia, or cloud computing giant Microsoft, but the industry is expanding rapidly and so are the potential opportunities.
Palo Alto Networks (NASDAQ: PANW) and Upstart (NASDAQ: UPST) are using AI to deliver new products and serve their customers more efficiently. Both companies will report their latest quarterly results in February, which could be a catalyst for further upside in their respective stocks.
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Here's why investors with a spare $260 (money they don't need for immediate expenses) might want to buy one share of Palo Alto and one share of Upstart.
1. Palo Alto Networks: A leader in AI-powered cybersecurity
With a market cap of $126 billion, Palo Alto is the world's biggest pure-play cybersecurity company. It offers three platforms to enterprise customers covering cloud security, network security, and security operations, and it's embedding AI into all of them to automate tasks ranging from threat hunting to incident response.
The average enterprise deals with more than 1,000 cybersecurity alerts every day (according to SentinelOne), which is overloading traditional human-led incident response processes and creating unacceptable vulnerabilities. Palo Alto launched its Cortex XSIAM security operations platform, which uses over 400 AI algorithms to automate those processes and ease the burden on managers.
For one oil and gas company, XSIAM reduced the number of incidents requiring manual investigation by 75%, and another customer now solves incidents 270 times faster than it could before. XSIAM is just one example of Palo Alto's AI-powered products.
The company generated $2.1 billion in revenue during its fiscal 2025 first quarter (ended Oct. 31, 2024), which was a 14% increase from the year-ago period. However, its annual recurring revenue (ARR) attributable to next-generation security (NGS) -- which includes AI products and services -- soared by 40% to a record $4.5 billion.
The company's guidance suggests that the ARR attributable to NGS will surpass $5.5 billion by the end of fiscal 2025, which would make up more than half of its forecast total revenue of $9.1 billion. This highlights how quickly customers are taking up AI cybersecurity products.
Palo Alto stock is currently trading near a record high, but its price-to-sales ratio (P/S) of 16.5 makes it far cheaper than its main rival, CrowdStrike Holdings, which trades at a P/S of 27.1.
PANW PS ratio, data by YCharts.
Palo Alto will report its results for the fiscal 2025 second quarter (ending Jan. 31) around the middle of February. Investors should pay close attention to whether the company raises its forward guidance for NGS revenue, because that would be an extremely bullish sign for its stock.
Looking longer term, the company plans to triple its NGS ARR to $15 billion by fiscal year 2030, which could propel its stock substantially higher.
2. Upstart: Transforming the lending industry with AI
Upstart developed a loan origination platform that approves and denies applications on behalf of banks that use its technology. It's powered entirely by AI, which offers several advantages compared to traditional assessment methods. See, Upstart believes banks are too reliant on outdated measures of creditworthiness like Fair Isaac's FICO scoring system, which has been around for more than three decades.
The FICO score is calculated based on five core metrics like a borrower's existing debts and repayment history. Upstart's AI algorithm analyzes more than 1,600 metrics instead, which the company believes provides a more accurate result.
In fact, it approves more than double the number of loans than traditional assessment methods, with an interest rate that is 38% cheaper, on average.
Upstart currently originates unsecured personal loans, car loans, and home equity lines of credit (HELOCs). It has struggled with weak demand for credit since 2022 because interest rates climbed significantly, but there are signs the lending environment is improving.
During the third quarter of 2024 (ended Sept. 30, 2024), it originated 186,786 unsecured personal loans alone, a 65% increase from the year-ago period.
Upstart will report its results for the final quarter of 2024 on Feb. 11. According to Wall Street's consensus forecast (provided by Yahoo!), the company's total revenue for the year could come in at $599 million, which would represent 16% growth compared to 2023. That is important, because it follows two consecutive years of declining revenue on the back of soaring interest rates.
Looking to 2025, analysts believe Upstart's revenue will soar by 37% to $820 million. Therefore, this might be a golden opportunity to buy the stock considering its still down 83% from its 2021 record high. The Federal Reserve has already cut interest rates three times since September, and two more cuts might be on the way this year, so the environment for Upstart's business should only improve further from here.
Lastly, there are more than $3 trillion loan originations each year in the company's addressable markets. It has only originated $40 billion worth of loans since it was founded in 2012, so it hasn't even scratched the surface of its opportunity.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike, Microsoft, Nvidia, and Upstart. The Motley Fool recommends Fair Isaac and Palo Alto Networks and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
