When evaluating a business as an investment, one key consideration is whether it operates in a growing marketplace. Once you've identified expanding industries, you can start sorting through the players in search of the companies that will have superior opportunities to thrive in those markets.
At this point, few segments carry such far-reaching implications as artificial intelligence. And in that space, data analytics firm Palantir Technologies (PLTR 3.10%) is finding success with its Artificial Intelligence Platform (AIP).
But AI is far from the only market that's expanding these days. The arena of natural and organic specialty foods is also rising fast, and one of the giants in this space is Sprouts Farmers Market (SFM 1.85%). Thanks to the secular trends driving the growth of these markets, these two companies make compelling investments for the long haul.
Palantir and the AI market
Artificial intelligence is a transformative technology, as the advent of OpenAI's ChatGPT illustrated. "We believe AI is a once-in-a-generation transition that will reshape virtually every portion of the computing market," said AMD CEO Lisa Su on the chipmaker's fourth-quarter earnings call.
Statista Market Insights predicts that the worldwide AI sector will grow from $184 billion this year to a whopping $827 billion by 2030. Palantir is capturing its piece of this substantial market through its AIP software.
AIP can ingest a client's business data from various sources, analyze it, and provide insights within days of its setup rather than the weeks or months it would take for traditional data analytics software systems.
Ease of use and its capacity for rapidly providing AI-powered business insights have made AIP a hit. "The organic and unconstrained demand for its capabilities is unlike anything we have seen in two decades," Palantir CEO Alex Karp said.
The company's robust AI technology helped it win a contract from the U.S. Army to perform research and experiments with artificial intelligence.
Triumphs like that drove Palantir's revenue up 17% to $2.2 billion in 2023. The company expects sales growth to accelerate in 2024, forecasting revenue to rise to about $2.7 billion.
Palantir also boasts impressive financial strength. Its 2023 free cash flow reached $730.5 million, up from $203 million in the prior year.
Moreover, Palantir's Q4 balance sheet revealed total assets of $4.5 billion versus total liabilities of just $961.5 million. The company exited 2023 with $3.7 billion in cash and marketable securities on its books.
Sprouts and the organic food market
While natural and organic foods may not capture the imagination quite like AI, this sector is also seeing significant growth. Fortune Business Insights has forecast that the global organic foods market will expand from $177.1 billion in 2023 to $529.6 billion by 2032.
This growth is happening for several reasons. Easy access to information online helped to build greater awareness of the health issues associated with the ultra-processed and packaged foods prevalent in typical grocery stores.
Adding to the momentum are recent actions taken by governments to protect the food supply. For example, in 2021, the European Union banned titanium dioxide as a food additive due to the possibility that it could be capable of damaging people's DNA. And last year, California banned four common food additives that had been linked to higher risks of health problems and diseases such as cancer.
Another factor bolstering the natural and organic food segment is a shift in attitudes about them among younger generations of Americans. Research by consulting firm Capgemini revealed that 72% of Gen Z shoppers prefer organic foods, while 66% of millennials do. Just 56% of boomers said the same.
Against this backdrop, Sprouts is seeing solid revenue growth. In 2023, sales rose 7% to $6.8 billion. For 2024, the company anticipates revenue will rise between 5.5% to 7.5% as it opens 35 new stores. The company ended 2023 with 407 stores in 23 states, so it has plenty of room for growth. In fact, Sprouts plans to expand its store base by about 10% annually.
While competition in the grocery industry is fierce, Sprouts possesses a competitive advantage. Organic food cannot contain preservatives, which means it spoils faster than conventional products. To address this, Sprouts built its supply chain around a model that keeps its stores in close proximity to its distribution centers, allowing it to rapidly restock them with fresh food.
Sprouts' success led to its stock doubling over the past year from a 52-week low of $32.12 last June. With shares stubbornly staying near the 52-week high of $65.53 reached in March, and the company's first-quarter report approaching on May 1, a good strategy for those looking to add it to their portfolios would be to use dollar-cost averaging -- picking up some shares now, then adding to your position at regular intervals.
