Why these two AI stocks could be huge winners over the next few years.
Artificial Intelligence (AI) is one of the most promising technological advancements of our time, and with it, there are a lot of companies set to greatly benefit from the technology.
AI has already helped the stock of chipmaker Nvidia go parabolic, with the stock up nearly 3,300% in the past five years. While such gains are rare, there will be other AI stocks that have the potential to see parabolic-type returns in the years ahead. Let's look at two top candidates.
1. SoundHound AI
SoundHound AI (SOUN 6.62%) was a little-known company that gained investor attention earlier this year when it was revealed that Nvidia had made an investment in the company. And it's easy to see what drew Nvidia to the stock.
SoundHound's AI voice platform is used to improve voice assistants so that they can interact with users in a more natural and conversational manner. The company's platform has gained strong traction in both the automotive and restaurant industry verticals, although its technology should have a wide range of applications that can be used across industries.
Getting its technology incorporated into smartphones would be one of the biggest potential catalysts for the company that could help supercharge its stock. Though there were over 92 million vehicles sold last year, that paled in comparison to the 1.17 billion smartphones that were sold.
Image source: Getty Images.
Right now, though, Soundhound has established strong relationships with a number of auto companies, which has resulted in a large backlog of contracted future revenue. The company has also quickly made strides in the restaurant industry, where its technology has been incorporated by both restaurant chains as well as fintech companies that serve the industry such as Toast and Olo.
SoundHound has a very attractive business model by which it collects royalty payments based on volume, usage, or life of the applicable product. This type of model tends to have a long tail, where the company will collect revenue on products that incorporate its technology for many years. Meanwhile, within the restaurant industry, it uses a subscription model, which provides a lot of visible, recurring revenue.
Trading at a 23 times forward price-to-sales (P/S) multiple, the stock is not cheap. However, if its technology can become incorporated into devices like smartphones and TVs, the sky's the limit.
SOUN PS Ratio (Forward) data by YCharts
AppLovin
Another stock that has been a big beneficiary of AI and has the potential to go parabolic is AI adtech company AppLovin (APP -0.18%). The release of its Axon 2 AI-based advertising technology has been a game changer for the company.
The company's latest adtech solution has helped its software platform revenue soar, including a whopping 91% increase in its most recent quarter. Axon 2 has been a hit with AppLovin's mobile gaming customers and has begun to draw in more of these customers given the success its clients are seeing.
Most of its gains came from existing customers, so the company has a strong opportunity to ramp up new customers who recently joined the platform from the buzz that Axon 2 has created.
However, the biggest opportunity for AppLovin and what could cause the stock to soar would be for the company to expand beyond its core gaming clients. AppLovin has said that given Axon 2's more predictive nature and increased use of automation, it will widen the number of advertisers it works with going forward.
The company plans to move into the e-commerce vertical, which would be a huge opportunity given the size of this market. It's also looking to apply the technology to web-based advertising.
Trading at a forward price-to-earnings (P/E) ratio of just above 15 times, AppLovin's stock is cheap for the type of growth it has been experiencing and the opportunity in front of it. Its combination of growth and valuation presents an opportunity for the stock to go parabolic if it can expand beyond its core gaming customers.
APP PE Ratio (Forward) data by YCharts
High risk, high reward
Both SoundHound and AppLovin are relatively small stocks that are still in the early days of reaching their potential. As such, they certainly can carry more risk (and more stock price volatility) than megacap stocks with deep resources.
However, with the added risk also comes the potential for greater reward. That said, investors should also size any investments in these companies accordingly given the greater risk they carry.
Geoffrey Seiler has positions in Toast. The Motley Fool has positions in and recommends Nvidia, Olo, and Toast. The Motley Fool has a disclosure policy.
