By now, it’s widely known: Artificial intelligence is here and rapidly transforming our world in ways we are only beginning to understand. But for investors, a few things are already clear.
First, AI is transforming industries across the landscape, from computing to digital advertising to sound recording and production to defense and intelligence – and that eclectic list is just the tip of the iceberg. And second, this widespread sea-change is opening up an array of opportunities for growth and profits. The AI sector is already worth more than $620 billion this year, according to data from Fortune Business Insights, and is expected to reach as high as $2.74 trillion by 2032. That represents a CAGR of more than 20% over the next 8 years.
This presents investors with the chance to invest in companies that are poised to capitalize on the AI revolution. The challenge lies in identifying the best AI stocks. Many companies will adopt this new technology, but not all will be equal. The savvy investor will seek out stocks with strong foundations in AI or the flexibility to adapt to evolving conditions.
Wall Street’s analysts know this. They’ve been sorting through the markets looking for solid AI-related stock choices – and they’re looking into the details, to find out just what makes each stock tick, and how AI fits into the picture. Ranging from that, the analysts are looking closely into Palantir (NYSE:PLTR) and SoundHound (NASDAQ:SOUN) to determine which is the superior AI stock to buy ahead of their upcoming earnings. Let’s take a closer look.
Palantir
We’ll start with Palantir Technologies, a company that is no stranger to generating buzz. Palantir has, since its 2003 founding by billionaire and tech-venture capitalist Peter Thiel, built itself into a leader in the global data analysis field. The company aims to develop the best of both human intuition and artificial intelligence, applying both to data analysis and reaping stronger benefits than either could provide alone. That mission was defined over 20 years ago, before the current AI boom, but it’s a mission easily adaptable to modern AI – especially generative AI. Palantir has recognized this, and built its current product lines on AI tech.
Palantir uses AI technology as a device to augment human analysts; this combination stands at the center of the company’s work. The combined benefits of human and AI are built through a range of apps and platforms, dedicated to data analysis and are available to customers by purchase or subscription. Users can interact with Palantir’s flagship platform, AIP, in their mother tongues through a natural language interface, a major enhancement as there is no need for users to master complex coding languages or computer scripts. The AI system can return its analysis results in ordinary language, as well, complete with nuances defined by the original questions, giving human users and analysts access to quality analysis with high levels of included detail.
Palantir has benefited greatly from this product model this year, with its stock soaring by 44%, far surpassing the S&P 500’s 12% growth rate.
In recent months, Palantir has announced some important contract wins, including a $153 million contract with the Department of Defense that includes potential additions totaling $480 million over the next five years. The company has also entered an agreement with the Tampa General Hospital, as well as an agreement with the green energy solutions firm Tree Energy Solutions. These agreements will bring Palantir’s AI technology to bear on the customer’s core businesses.
In its last reported quarterly results, covering 1Q24, Palantir showed that it generated $634 million at the top line, up 20% year-over-year and beating the forecast by over $16.7 million. The company’s bottom line came to a non-GAAP earnings per share of 8 cents, in line with the forecasts. Both revenue and earnings have been on an upward trajectory in recent quarters.
Looking ahead, the August 5 release of the company’s Q2 results is expected to show a total of $652.42 million in revenue, with a repeat of the 8-cent non-GAAP EPS. Hitting those results would translate to a 22%-plus y/y revenue gain, and a y/y increase of 3 cents per share in EPS.
Despite these likely gains, Monness’ Brian White, a 5-star analyst rated in the top 1% of the Street’s stock pros, sees PLTR shares as overvalued.
“This 19-month gen AI propaganda cycle has resulted in Palantir trading at what we view as an absurd valuation. Based on our estimates, Palantir garners the richest valuation in our enterprise software group based on EV/revenue, while also claiming the top spot in our coverage universe at large. Given the exorbitant number of shares outstanding, we believe it will take several years for Palantir to grow into its current valuation. In the end, we believe the stock will face the consequences of the industry’s AI hustle,” White opined.
White goes on to chart out a probably long-term path for the company, saying, “In the long run, we believe Palantir is well positioned to benefit from the AI trend and capitalize on volatile geopolitics; however, valuation is extreme, the software complex is under pressure, revenue recognition from government-related contracts has proven lumpy, execution spotty, and we believe the darkest days of this economic quagmire are ahead of us.”
To this end, White rates Palantir shares a Sell, with a price target of $20, pointing toward a 19% downside from current levels. (To watch White’s track record, click here)
Overall, the Street gives Palantir’s shares a Hold consensus rating, based on 14 recent analyst reviews that include 3 Buy recommendations, 5 Holds, and 6 Sells. The shares are priced at $24.74 and the average target price of $22.42 implies the stock will contract by 9% heading out to the one-year horizon. (See PLTR stock forecast)
SoundHound AI (SOUN)
The second stock we’ll look at is SoundHound, a tech firm based in Silicon Valley and specializing in the application of AI to voice technology solutions. SoundHound describes this as conversational intelligence, and applies it to a wide range of industries. These include the automotive sector, where the company’s tech enables voice-activated controls; the restaurant industry, where it is applied to drive-thru, phone, and kiosk orders; and smart devices that can be enabled to prompt and respond to a variety of voice commands. That list is hardly conclusive; SoundHound’s conversational AI tech promises to expand the horizons of the hands-free world.
SoundHound aims to give a voice to every brand through voice-enabled products, services, interfaces, and apps. This approach offers numerous benefits to both companies and consumers, including improved data analytics, brand control, and enhanced customer experience. The system is customizable, supporting up to 25 languages and understanding regional and dialectal variations.
At the end of July, in an important development, SoundHound announced that two of Stellantis’s automotive brands in Europe will be rolling out in-vehicle voice assistants integrated with ChatGPT. The voice assistant will be a versatile conversational AI, and will be available in Alfa Romeo and Citroen vehicles. These will join Peugeot, Opel, and Vauxhall vehicles, which have voice assistants available in 11 European markets, including the UK, France, Spain, Italy, Germany, and Austria.
For the first quarter of this year, SoundHound reported $11.6 million in revenues, beating the forecast by almost $1.5 million and growing an impressive 73% year-over-year. The company ran a net loss in the quarter, of 7 cents per share in non-GAAP measures – but that was a penny better than had been anticipated.
SoundHound will release its Q2 results on August 8, with market expectations set at $13.09 million in revenue and a 9-cent loss per share.
The company’s solid foundation has attracted the attention of Scott Buck, who covers the shares for H.C. Wainwright.
“While we do not believe the business brings any meaningful revenue today, the company’s technology should help accelerate SoundHound’s efforts in creating and monetizing a voice commerce ecosystem. While SOUN shares have outperformed the broader markets year to date… we believe clear business progress, a cleaner balance sheet, and favorable investor demand trends for AI companies should continue to drive interest in shares. As the company continues to demonstrate its ability to execute on its current strategy, and move the business towards consistent profitability, we believe valuation levels should continue to move towards high quality AI peers,” Buck opined.
These comments support the analyst’s Buy rating, while his $7 price target points toward a 12-month gain of 51.5%. (To watch Buck’s track record, click here)
Overall, SoundHound has a Strong Buy consensus rating from the analyst consensus, a rating that is backed up by 4 Buy recommendations and 1 Hold. The stock is currently priced at $4.62 and its $7.50 average target price implies a one-year upside potential of ~62%. (See SOUN stock forecast)
The signs are clear: Wall Street chooses SoundHound as a superior AI stock to buy. Ahead of earnings results, this stock shows a sound combination of attractive valuation and long-term potential.
To find good ideas for AI stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
