Since artificial intelligence’s (AI) burst in popularity early last year, investors have been captivated by the potential for AI stocks to go parabolic. Take SoundHound AI for example. Since reports emerged in mid-February that Nvidia (NVDA 0.12%) owned a stake in the company, its stock has exploded higher, soaring as much as 295% in the weeks that followed.
However, investors should be careful, as following the herd can be costly. SoundHound AI has fallen out of favor with at least one formerly bullish analyst and has been the target of a short report that raises several valid concerns. Furthermore, SoundHound AI sells for 18 times next year’s sales and, despite its impressive growth, has yet to generate a profit.
That’s not to say this investment won’t end up being a winner, but given the risky nature of this company, I would suggest investors forget SoundHound AI stock and look at these two AI leaders instead.
Image source: Getty Images.
1. Nvidia
When it comes to AI, there’s a compelling argument that no other company is better positioned to ride the AI wave than Nvidia itself. The company adapted its technology to accelerate AI models years ago and is the undisputed leader in powering machine learning algorithms, with an estimated 95% market share, according to New Street Research.
As a result, Nvidia already had a wealth of experience when generative AI burst on the scene early last year. The company adapted its processors to provide the computational horsepower needed to run AI systems, and sales were off to the races.
For its fiscal 2024 fourth quarter (ended Jan. 28), Nvidia delivered record revenue that surged 265% year over year to $22.1 billion, fueling adjusted earnings per share (EPS) that soared 486% to $5.16. This marked the third consecutive quarter of triple-digit year-over-year growth — and it likely won’t be the last. For the current quarter, management is forecasting record revenue of $24 billion, up 234% year over year.
There are other reasons to believe Nvidia’s growth spurt will continue. A great deal of AI processing and workloads take place in the cloud, and Nvidia has an edge there as well. The company has a market share estimated at 95% of the graphics processing units (GPUs) used in the data center space, according to CFRA equity analyst Angelo Zino.
The buildout of data centers capable of AI processing has already begun. CEO Jensen Huang suggests that the spending necessary to bring data centers up to par will double to $2 trillion over the next several years.
Nvidia isn’t exactly cheap at 38 times forward earnings but has earned the premium thanks to its triple-digit growth.
Rather than buy the stock that Nvidia bought, why not just buy Nvidia itself?
2. Super Micro Computer
Another company that’s already reaping the benefits of the accelerating adoption of generative AI is Super Micro Computer (SMCI -1.30%), commonly referred to as Supermicro. The company also plays a big part in the processing of AI, developing the servers robust enough to handle the AI workload.
The company partners with Nvidia, Advanced Micro Devices, and Intel, among others, to ensure its servers are optimized to work with their latest and most robust processors. Furthermore, these collaborations ensure that Supermicro has a steady supply of AI-centric chips to power its servers.
For its fiscal 2024 second quarter (ended Dec. 31, 2023), Supermicro produced net sales of $3.66 billion, which surged 103% year over year, driving adjusted EPS of $5.59, up 71%. Management was clear that its record revenue was the result of strong demand for rack-scale systems used for AI.
There are those who believe that Supermicro is taking share from its rivals. Barclays analyst George Wang posits that Supermicro “has 7% market share globally, implying further share gains ahead are likely.” He goes on to suggest that Supermicro is stealing share from Dell Technologies and Hewlett Packard Enterprise.
Furthermore, the aforementioned data center upgrade cycle benefits Supermicro as well. Bernstein analyst Toni Sacconaghi has calculated that the AI server market will grow 75% annually over the next three years, calling the resulting buildout “unprecedented.”
Supermicro’s stock has surged, up 842% over the past year (as of this writing), yet is still remarkably cheap at less than 3 times next year’s sales.
Given its bargain-basement valuation and history of profits, Supermicro is a far better AI stock than SoundHound AI.
Danny Vena has positions in Nvidia and Super Micro Computer. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
