2 Top Artificial Intelligence (AI) Stocks Ready for a Bull Run

Feb 22, 2024

Over the past year, investors have taken a keen interest in companies that can benefit from the proliferation of artificial intelligence (AI), which is not surprising as this technology is expected to help improve the global gross domestic product (GDP) by 7%, or almost $7 trillion, over the next decade, as per Goldman Sachs.

Companies that are already benefiting from AI adoption have seen their shares surge big time. But there are a few companies whose share prices are yet to hit a higher gear even though they could win big from AI proliferation. Taiwan Semiconductor Manufacturing (NYSE: TSM), popularly known as TSMC, and SoundHound AI (NASDAQ: SOUN) are two such names.

TSMC stock’s 40% jump in the past year means that it has underperformed the PHLX Semiconductor Sector index’s gains of 50%. Meanwhile, SoundHound AI stock is down 5% in the past year even though it has been reporting solid growth thanks to the growing demand for its offerings. The good news is that both stocks have gained impressive momentum of late and look all set to go on a bull run. Here’s why.

1. Taiwan Semiconductor Manufacturing

TSMC stock is up 21% so far in 2024, and investors can expect this semiconductor bellwether to head higher thanks to the booming demand for AI chips. TSMC operates on a foundry model, which means that it manufactures chips that are designed by fabless chipmakers such as Nvidia and Advanced Micro Devices. Also, Apple is TSMC’s largest client, using the Taiwan-based company’s fabrication facilities to manufacture chips that are deployed in iPhones.

This strong clientele explains why TSMC’s revenue for January 2024 increased almost 8% year over year to 216 billion new Taiwan dollars ($6.86 billion). The month-over-month increase was even bigger at 22.5%. It is not surprising to see why TSMC’s growth is switching into a higher gear now. Last month, the company forecast that its 2024 revenue could increase more than 20%, and AI is going to play a crucial role in that growth.

That’s because TSMC’s 5-nanometer (nm) chip platform is being used by both Nvidia and AMD to manufacture their AI chips. Meanwhile, Intel is also expected to use the 5nm chip platform to manufacture its next-generation Gaudi3 AI accelerators. Given that both Nvidia and AMD are reportedly looking to substantially increase the production of their AI chips in 2024 and TSMC is scaling up its capacity to satisfy the demand, there is a good chance that its revenue should continue heading higher as the year progresses.

Meanwhile, the demand for TSMC’s 3nm chip platform is predicted to increase in the second half of the year when Nvidia releases its next-generation AI chips. Not surprisingly, analysts have increased their revenue growth expectations for TSMC.

TSM Revenue Estimates for Current Fiscal Year Chart

TSM Revenue Estimates for Current Fiscal Year Chart

With the demand for AI chips set to increase at an annual pace of 38% through 2032, TSMC should ideally be able to maintain a healthy growth rate in the long run as its chip manufacturing is utilized by key AI semiconductor manufacturers. That’s why investors would do well to buy TSMC right away as it is trading at 25 times trailing earnings, a discount to the Nasdaq-100 index’s earnings multiple of 32 (using the index as a benchmark for valuing tech stocks).

2. SoundHound AI

SoundHound AI stock may have underperformed the broader market over the past year, but it has simply taken off after chip giant Nvidia revealed in a 13F filing that it has invested $3.7 million in the company. As a result, share prices of SoundHound AI — which provides an AI-enabled voice platform to customers and helps them build and deploy conversational voice assistants — surged a whopping 66% in a single day.

This eye-popping surge brought SoundHound’s year-to-date gains to 80%. As a result, the stock now trades at 21 times sales. The good part is that SoundHound could justify its expensive valuation thanks to its robust growth. SoundHound hasn’t released its full-year 2023 results yet.

However, its fourth-quarter revenue guidance of $16 million to $20 million indicates that it would have ended the year with revenue of almost $47 million at the midpoint (based on its revenue of $28.7 million for the first nine months of the year). That would be a 51% jump from its 2022 revenue of $31 million when the company’s top line increased 47%.

Even better, analysts expect SoundHound to maintain a 40%-plus revenue growth rate in 2024 and 2025 as well.

SOUN Revenue Estimates for Current Fiscal Year Chart

SOUN Revenue Estimates for Current Fiscal Year Chart

The chart above also tells us that consensus analyst estimates have significantly increased revenue growth expectations for SoundHound. That’s not surprising, as the company’s cumulative bookings backlog stood at $341.7 million at the end of the third quarter of 2023. SoundHound points out that “bookings are derived from committed customer contracts and reflect revenue expected to be realized over the life of such contracts.”

So, the company has a solid revenue pipeline that should allow it to maintain healthy growth rates not only in 2024 and 2025, but also over the long run. What’s more, SoundHound management points out that it sees a huge total addressable market (TAM) worth $160 billion in 2026, driven by the growing demand for AI-powered voice platforms across multiple markets such as automotive, restaurants, retail, healthcare, and entertainment, among others.

Not surprisingly, SoundHound AI’s forward sales multiples are substantially lower than its trailing price-to-sales ratio.

SOUN PS Ratio Chart

SOUN PS Ratio Chart

As such, investors looking to buy a hot AI stock may want to buy SoundHound before it soars higher, especially considering that the company’s robust growth could help support its impressive stock market rally.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Goldman Sachs Group, Nvidia, and Taiwan Semiconductor Manufacturing. 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 February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

2 Top Artificial Intelligence (AI) Stocks Ready for a Bull Run was originally published by The Motley Fool

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