Artificial intelligence (AI) stocks performed exceptionally well this year – and I’m not just talking about the AI chip king Nvidia. With many believing that AI could revolutionize virtually every part of daily life, investors are looking for the best stocks in virtually every sector, from cybersecurity to business analytics and consumer goods.
Two stocks that have aroused interest are Palo Alto Networks (NASDAQ: PANW) And SoundHound AI (NASDAQ: SOUND). Palo Alto has performed well this year, with a price increase of more than 30%. Meanwhile, SoundHound AI, which has a much smaller market cap than Palo Alto, has been a rocket ship with its stock up 630%. Wall Street analysts see significant downside in one of these stocks, but recommend buying the other. Let’s see.
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SoundHound helps companies create or add artificial intelligence voice capabilities to their products, services and apps. The company’s solutions include AI voice assistants, automatic speech recognition, real-time transcription services, and restaurant phone answering and ordering. Automotive companies love Mercedes Benz And Honda use SoundHound for voice solutions in the vehicles they sell to consumers.
Stocks that have been on the run like SoundHound AI will be vulnerable to analysts and perhaps even short sellers calling for a pullback. The company is not yet profitable and has a market capitalization of $5.7 billion. Recently, SoundHound completed its acquisition of Amelia, a leader in conversational AI for large enterprises, which management believes will help SoundHound expand into new industries such as finance and healthcare.
According to Tipranks, five analysts have issued research reports on the company in the past three months. Three rate the company with a buy and two with a hold. However, the average price target of these analysts is $8.10, implying a downside of about 44% for the stock, as of December 9. The high estimate for the stock is $10, while the low estimate is $6.
Ladenburg Thalmann Financial Services recently downgraded SoundHound from a buy rating to a neutral rating and maintained its $7 price target. The company noted that SoundHound reported “solid” results last quarter, but thinks the Amelia acquisition and huge profits this year will lead to some near-term pressure. The company trades at a price-to-sales ratio as high as 68, so while the company looks solid and has huge potential, I think you’ll be able to buy shares at a cheaper level sooner rather than later.
Palo Alto Networks uses machine learning and AI to protect businesses against a variety of advanced cyber threats. The company’s network security platform offers a range of plans, including advanced threat protection, advanced URL filtering, Software-as-a-Service (SaaS) protection, protection on networks used across devices, and much more.
Most of the business world is now digital, and the largest companies say cyber attacks are among their biggest threats, which can shut down systems and disrupt their customers. Cyber attacks also make customer data vulnerable. Palo Alto gets most of its revenue from subscriptions, which can range from one to five years, providing a stream of recurring revenue. Subscription revenues increased by 19% last year compared to the previous twelve months.
According to TipRanks, 36 analysts have issued research reports on Palo Alto in the past three months. Of this group, 31 analysts rate the company as buy, four as hold and one as sell. The average price target over a twelve-month period implies an upside potential of 4.5%. Research analysts at Argus recently raised their price target on Palo Alto, citing solid fourth-quarter results and the company’s positioning in a fast-growing and important market.
The stock is certainly not cheap, trading at 63 times earnings. However, I agree with the Argus analysts. Cybersecurity is an increasingly important part of the world and I suspect it will only become more important. This could lead to enormous market opportunities and potential competition for companies that can gain a foothold. Given these factors, I’d be more inclined to pay a higher valuation for Palo Alto Networks.
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Bram Berkowitz has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
Palo Alto Networks Stock vs. SoundHound AI Stock: Wall Street Sees Significant Downside in 1 and Says Buy the Other was originally published by The Motley Fool
