2 Artificial Intelligence (AI) Stocks to Buy Before They Rise 81% and 83% According to Certain Wall Street Analysts

Enthusiasm around artificial intelligence (AI) boosted shares of super microcomputer (NASDAQ: SMCI) i SoundHound AI (NASDAQ: SO) higher by 506% and 96%, respectively, during the last year. But both stocks still have a consensus “buy” rating on Wall Street, and some analysts are predicting big gains for shareholders.

• Ananda Baruah has set a price target of $1,500 per share on Super Micro Computer, which implies an 81% upside to its current price of $830 per share.

• DA Davidson’s Gil Luria set a $9.50 price target on SoundHound AI, which implies an 83% upside from their current price of $5.20 per share.

Investors should never place too much reliance on price targets, especially price targets set by individual analysts. But Supermicro and SoundHound deserve extra consideration given their superior performance.

Here’s what investors should know.

1. Super microcomputer

Super Micro Computer designs and manufactures accelerated computing platforms that include servers and storage systems. The company sources chips, memory and other hardware from partners such as Nvidia i Intel. Its computing platforms are designed specifically for enterprise data centers and the cloud, and Supermicro is an early leader in the artificial intelligence (AI) server market, according to Samik Chatterjee at JPMorgan Chase.

The success in the AI ​​server market can be attributed to its core development approach, which has two main advantages. First, Supermicro can bring servers equipped with the latest chips to market faster than its competitors. Second, these blocks come together in countless combinations, so Supermicro offers the broadest and deepest portfolio of advanced server and storage solutions in the IT industry.

Supermicro reported strong financial results in its fiscal third quarter (ended March 31), but shares fell 15% as it missed consensus sales estimates. To break it down, revenue rose 200% to $3.85 billion, but Wall Street was expecting $3.95 billion in revenue. Still, investors may have overreacted as non-GAAP net income still rose 308% to $6.65 per diluted share, easily beating the $5.78 per diluted share expected by the analyst

In addition, CEO Charles Liang told analysts on the earnings call that Supermicro would have delivered more products in the quarter if supply had not been constrained. The company also raised its full-year outlook, so the midpoint of guidance now implies revenue growth of 110% in fiscal 2024. That beats the consensus estimate among analysts , which is calling for revenue to rise 106% to $14.6 billion.

The story continues

According to JPMorgan, the AI ​​server market is expected to expand by 47% annually between 2023 and 2028. Meanwhile, Wall Street analysts expect Supermicro to grow earnings per share by 47% annually over the next three or five years. That consensus estimate makes its current valuation of 46.7 times earnings look reasonable. Supermicro shareholders shouldn’t expect an 81% gain next year, but investors should consider buying a small position today.

2. SoundHound AI

SoundHound offers conversational intelligence solutions, also called voice artificial intelligence (AI) products, that can be built into all types of smart devices. Its voice AI technology has applications in the automotive, food and beverage, and consumer electronics industries. For example, their customer base includes well-known brands such as Stellantis, Toastsi Qualcomm.

SoundHound is a relatively small company (its market cap is less than $2 billion) that competes with much larger companies such as Amazon i Microsoft. But management says it has better technology than its rivals and that its platform gives brands more flexibility to create differentiated and personalized voice AI solutions. DA Davidson’s Gil Luria cited this technology-based competitive moat as one of the reasons for his $9.50 per share price target.

SoundHound is growing like wildfire. Revenue rose 80% to $17 million in the fourth quarter, and the company reported a smaller GAAP loss of $0.07 per diluted share, up from $0.15 per diluted share a year earlier. This progress is encouraging, but SoundHound may need to issue equity or debt in the future. The company burned through $68 million last year and currently only has $95 million in cash on its balance sheet.

SoundHound recently completed the $25 million acquisition of SYNQ3 Restaurant Solutions, a specialist in conversational intelligence for food and beverage brands. This deal establishes SoundHound as the largest provider of voice AI technology for restaurants and expands the reach of the market by an order of magnitude, according to CEO Keyvan Mohajer.

Looking ahead, Juniper Research estimates that spending on voice AI will reach $160 billion by 2026, driven by growing demand across numerous industries. Meanwhile, Wall Street analysts believe SoundHound will grow sales by 50% annually over the next two years. That consensus estimate makes the current valuation of 26 times sales look tolerable, though the stock certainly isn’t cheap.

While I doubt shareholders will see an 83% gain next year, investors should still consider buying a very small position, as long as they understand the risks, especially those related to competition. SoundHound may have better voice AI technology, but companies like Amazon and Microsoft have far more resources.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool Company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon, JPMorgan Chase, Microsoft, Nvidia, Qualcomm and Toast. The Motley Fool recommends Intel and Stellantis and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft and short of May 2024 of $47 at Intel. The Motley Fool has a disclosure policy.

2 Artificial Intelligence (AI) Stocks to Buy Before They Rise 81% and 83%, According to Certain Wall Street Analysts was originally published by The Motley Fool