Generative AI Upside: 2 Software Stocks Could Triple Revenue in 5 Years

The artificial intelligence (AI) market has grown rapidly over the past decade. Most of its recent growth was fueled by new generative AI platforms -- such as OpenAI's ChatGPT and Alphabet's Google Gemini -- which pull data from large language models (LLMs) to generate fresh content and human-like responses in natural conversations.

Many AI-oriented investors focus on chipmakers such as Nvidia and Broadcom, which provide the best picks and shovels for the AI gold rush. But investors shouldn't overlook the AI software companies that are also profiting from that megatrend. Two of those highest-growth software companies are Palantir (NASDAQ: PLTR) and Innodata (NASDAQ: INOD). Let's see how both companies could triple their revenue over the next five years, and which one is a better buy right now.

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What do Palantir and Innodata do?

Palantir operates two main platforms: Gotham for government agencies, and Foundry for its commercial customers. Both of these platforms aggregate data from disparate sources to help their clients spot trends and make smarter data-driven decisions. It's already in use among most U.S. government agencies and big companies such as Amazon.

Innodata was once a slow-growth data analytics company. But in 2018, it launched a suite of task-specific microservices for annotating and preparing large amounts of data for AI applications. When big tech companies launch a new AI project, they often spend 80% of their time preparing that data and the remaining 20% on training the AI algorithms. To address those inefficiencies, at least five of the "Magnificent Seven" companies started to use Innodata's microservices to clean up and prepare their AI-oriented data.

How fast are Palantir and Innodata growing?

From 2020 to 2024, Palantir's revenue grew at a compound annual growth rate (CAGR) of 27% from $1.1 billion to $2.9 billion. It also turned profitable on the basis of generally accepted accounting principles (GAAP) in 2023 and more than doubled its GAAP net income in 2024. Those soaring profits led to its inclusion in the S&P 500 and Nasdaq-100 indexes last year.

Palantir's growth slowed down in 2022 and 2023 as it grappled with the uneven timing of its government contracts and some tough macro headwinds for its commercial business. But its growth accelerated again over the following two years as new geopolitical conflicts fueled fresh government contracts, its commercial customers ramped up their spending again in a milder macro environment, and it rolled out more tools for building custom generative AI applications.

From 2020 to 2024, Innodata's revenue increased at a CAGR of 31%, from $58 million to $170 million. It also turned profitable on a GAAP basis in 2024.

Innodata's big growth spurt was driven by the rapid expansion of the generative AI market, which drove the top tech companies to build new LLMs, AI chatbots, and other AI-powered tools. It supported that expansion by ramping up its research and development investments in its newer Innodata Labs unit, which supports those scalable AI-data-preparation services.

Why could Palantir and Innodata triple their revenues in five years?

From 2024 to 2027, analysts expect Palantir's revenue to grow at a CAGR of 44% to $8.5 billion. That's already nearly triple the $2.9 billion in revenue it generated in 2024. If Palantir matches that forecast and continues to grow at a CAGR of 20% over the following three years, its revenue could rise to $14.7 billion by 2030. That's a bright outlook, but it already has a market cap of $407 billion -- which is 93 times this year's projected sales. That bubbly valuation could limit its near-term gains.

From 2024 to 2026, analysts expect Innodata's revenue to rise at a CAGR of 36% from $170 million to $313 million. If it matches those estimates and grows at a CAGR of 20% over the following four years, its revenue could hit $649 million in 2030. With a market cap of $1.9 billion, it still looks reasonably valued at eight times this year's sales.

Which stock is a better buy right now?

Palantir is growing like a weed, but too much optimism has been baked into its high-flying shares. Innodata still has plenty of upside potential, but it's less well known and trades at more reasonable valuations. So while both of these companies could more than triple their revenues in five years, Innodata seems like a better buy than Palantir right now.

Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Nvidia, and Palantir Technologies. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.