Enthusiasm surrounding artificial intelligence (AI) propelled shares of Super Micro Computer (NASDAQ: SMCI) and SoundHound AI (NASDAQ: SOUN) higher by 506% and 96%, respectively, during the past year. But both stocks still carry a consensus rating of “buy” on Wall Street, and certain analysts are forecasting big gains for shareholders.
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Ananda Baruah has set Super Micro Computer with a price target of $1,500 per share, implying 81% upside from its current price of $830 per share.
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Gil Luria at DA Davidson has set SoundHound AI with a price target of $9.50 per share, implying 83% upside from its current price of $5.20 per share.
Investors should never put too much confidence in price targets, especially price targets set by individual analysts. But Supermicro and SoundHound warrant further consideration given their outperformance.
Here’s what investors should know.
1. Super Micro Computer
Super Micro Computer designs and manufactures accelerated computing platforms comprising server and storage systems. The company sources chips, memory, and other hardware from partners like Nvidia and Intel. Its computing platforms are purpose-built for enterprise and cloud data centers, and Supermicro is an early leader in the artificial intelligence (AI) server market, according to Samik Chatterjee at JPMorgan Chase.
Success in the AI server market can be attributed to its building block approach to development, which has two major benefits. First, Supermicro can bring servers equipped with the latest chips to market faster than its competitors. Second, those building blocks come together in countless combinations, such that Supermicro offers the broadest and deepest portfolio of advanced server and storage solutions in the IT industry.
Supermicro reported solid financial results in the third fiscal quarter (ended March 31), but shares plunged 15% because it missed consensus sales estimates. To elaborate, revenue increased 200% to $3.85 billion, but Wall Street anticipated $3.95 billion in revenue. Even so, investors may have overreacted given that non-GAAP net income still soared 308% to $6.65 per diluted share, easily beating the $5.78 per dilute share analyst expected.
Moreover, CEO Charles Liang told analysts on the earnings call that Supermicro would have delivered more products during the quarter had it not been supply constrained. The company also raised its full-year outlook, such that the midpoint of guidance now implies 110% revenue growth in fiscal 2024. That tops the consensus estimate among analysts, which calls for revenue to increase 106% to $14.6 billion.
The AI server market is projected to expand at 47% annually between 2023 and 2028, according to JPMorgan. Meanwhile, Wall Street analysts expect Supermicro to grow earnings per share at 47% annually over the next three to five years. That consensus estimate makes its current valuation of 46.7 times earnings look reasonable. Supermicro shareholders should not count on an 81% gain in the next year, but investors should consider buying a small position today.
2. SoundHound AI
SoundHound offers conversational intelligence solutions, also called voice artificial intelligence (AI) products, that can be incorporated into all manner of smart devices. Its voice AI technology has applications across the automotive manufacturing, food and beverage, and consumer electronics industries. For instance, its customer base includes well-known brands like Stellantis, Toast, and Qualcomm.
SoundHound is a relatively small business (its market capitalization is under $2 billion) competing against much larger companies like Amazon and Microsoft. But management says it has better technology than its rivals, and that its platform affords brands more flexibility in building differentiated and customized voice AI solutions. Gil Luria at DA Davidson cited that technology-based competitive moat as one reason for his price target of $9.50 per share.
SoundHound is growing like wildfire. Revenue rose 80% to $17 million in the fourth quarter, and the company reported a smaller GAAP loss of $0.07 per diluted share, up from $0.15 per diluted share in the prior year. That progress is encouraging, but SoundHound may have to issue stock or debt in the future. The company burned $68 million last year, and it currently has just $95 million in cash on its balance sheet.
SoundHound recently completed its $25 million acquisition of SYNQ3 Restaurant Solutions, a specialist in conversational intelligence for food and beverage brands. That deal establishes SoundHound as the largest provider of voice AI technology for restaurants and extends it market reach by an order of magnitude, according to CEO Keyvan Mohajer.
Looking ahead, Juniper Research estimates voice AI spending will reach $160 billion by 2026, driven by growing demand across numerous industries. Meanwhile, Wall Street analysts think SoundHound will grow sales at 50% annually over the next two years. That consensus estimate makes the current valuation of 26 times sales seem tolerable, though shares are certainly not cheap.
While I doubt shareholders will see an 83% gain in the next year, investors should still consider buying a very small position, provided they understand the risks, especially those related to competition. SoundHound may have better voice AI technology, but companies like Amazon and Microsoft have far more resources.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon, JPMorgan Chase, Microsoft, Nvidia, Qualcomm, and Toast. The Motley Fool recommends Intel and Stellantis and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
2 Red-Hot Artificial Intelligence (AI) Stocks to Buy Before They Soar 81% and 83%, According to Certain Wall Street Analysts was originally published by The Motley Fool
Source: finance.yahoo.com