Artificial intelligence (AI) is one of the most promising technological developments of our time, meaning many companies will benefit greatly from the technology.
AI has already helped the chipmaker’s stock Nvidia are going parabolic, with the stock up nearly 3,300% over the past five years. While such gains are rare, there will be other AI stocks that have the potential to deliver parabolic returns in the coming years. Let’s take a look at two top candidates.
1. SoundHound AI
SoundHound AI (NASDAQ: SOUND) was a little-known company that caught investors’ attention earlier this year when it was announced that Nvidia had made an investment in the company. And it’s easy to see what attracted Nvidia to the stock.
SoundHound’s AI voice platform is used to enhance voice assistants so they can communicate with users in a more natural and conversational way. The company’s platform has gained strong traction in both the automotive and restaurant sectors, although the technology should have a wide range of applications that can be used across industries.
Integrating the technology into smartphones would be one of the biggest potential catalysts for the company that could boost its stock. Although more than 92 million vehicles were sold last year, that paled in comparison to the 1.17 billion smartphones sold.
However, at this point, Soundhound has built strong relationships with a number of automotive companies, which has resulted in a large backlog of contracted future revenue. The company has also made rapid strides in the restaurant industry, where the technology has been adopted by both restaurant chains and fintech companies serving the industry, such as Toast And Olo.
SoundHound has a very attractive business model where it collects royalty payments based on volume, usage or lifespan of the product in question. This type of model usually has a long tail, where the company will generate revenue for years from products that incorporate its technology. The restaurant industry now uses a subscription model, which generates a lot of visible, recurring income.
The stock trades at a price-to-sales (P/S) multiple of 23 times and isn’t cheap. However, if the technology can be integrated into devices such as smartphones and TVs, the possibilities are endless.
AppLovin
Another stock that has been a big beneficiary of AI and has the potential to go parabolic is the AI adtech company AppLovin (NASDAQ: APP). The release of the Axon 2 AI-based advertising technology was a game changer for the company.
The company’s latest adtech solution has skyrocketed revenue from its software platform, including a whopping 91% increase in the most recent quarter. Axon 2 has been a hit among AppLovin’s mobile gaming customers and is starting to attract more of these customers given the success its customers are seeing.
Most of the profits came from existing customers, so the company has a great opportunity to attract new customers who recently joined the platform thanks to the buzz Axon 2 has created.
However, the biggest opportunity for AppLovin and what could drive its stock price higher would be for the company to expand beyond its core gaming customers. AppLovin has said that given the more predictive nature of Axon 2 and increased use of automation, the number of advertisers it works with will increase in the future.
The company plans to focus on e-commerce verticals, which would be a huge opportunity given the size of this market. The company also wants to apply the technology to web-based advertising.
AppLovin’s stock trades at a price-to-earnings (P/E) ratio of just over 15 times and is cheap for the kind of growth it has experienced and the opportunities it presents. The combination of growth and appreciation presents an opportunity for the stock to go parabolic if it can expand beyond its core gaming customers.
High risk, high reward
Both SoundHound and AppLovin are relatively small stocks that are still in the early stages of reaching their potential. As such, they can certainly carry more risk (and more stock price volatility) than mega-cap stocks with deep resources.
However, with the added risk also comes the potential for greater reward. That said, investors should also price their investments in these companies accordingly, given the higher risk they pose.
Should you invest $1,000 in SoundHound AI now?
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Geoffrey Seiler holds positions in Toast. The Motley Fool holds and recommends positions in Nvidia, Olo, and Toast. The Motley Fool has a disclosure policy.
2 Artificial Intelligence (AI) Stocks That Could Go Parabolic was originally published by The Motley Fool
