The broader U.S. stock market has enjoyed a remarkable run since artificial intelligence (AI) emerged as a game changer in early 2023. The S&P 500 has rocketed over 50% higher over the past two years. Yet some AI stocks have made those gains appear like child’s play.
For the reason that starting of 2023, social media giant Meta Platforms(NASDAQ: META) has soared over 400%, a jaw-dropping return for such a big company. SoundHound AI(NASDAQ: SOUN), an emerging player in audio AI technology, has topped it with nearly 700% returns. Amazingly, software company Palantir Technologies(NASDAQ: PLTR) has topped all of them, galloping over 900% in only 24 months.
These meteoric growth trajectories aren’t typical of the stock market. So, have they got the extraordinary fundamentals to justify their returns? Or, more importantly, can they proceed? The reply is a mixed bag.
Much of what you’ve got seen about AI has involved text-based prompts, but conversational AI, the flexibility to talk to it (and have it speak back), is prime to how AI can impact day by day life. SoundHound AI focuses on audio and conversation-based AI technology. That is more complex since it involves the intelligence to think and generate responses, plus the intelligence to know and translate an audio prompt into machine data.
SoundHound AI began within the automotive industry. It’s possible you’ll be aware of speaking commands to your vehicle while driving. The corporate has since expanded to the restaurant industry, powering conversational AI for drive-thrus and ordering. Nonetheless, the expansion potential is big, including almost any application with human agents. Take into consideration call centers, retail, and customer support across many industries.
The corporate’s revenue grew 89% yr over yr within the third quarter, and management raised guidance for the fourth quarter. Unfortunately, that growth is on a small scale; Q3 revenue was only $25.2 million. Meanwhile, the stock has an enterprise value of $5.1 billion, against 2025 revenue estimates of $164 million. That is a ratio of 31, making SoundHound very expensive today. It could possibly be difficult for the stock to proceed at its current pace, so prospective shareholders should search for a pullback before buying.
AI software will impact almost every industry in the longer term, so there’s an enormous opportunity ahead of Palantir Technologies. The corporate’s AIP platform for developing and deploying AI applications has lit a fireplace under the business. Revenue growth has accelerated for several quarters, and the corporate still only has 629 industrial customers. There are tons of of 1000’s of huge enterprises worldwide (potential customers), so Palantir’s long-term ceiling is excitingly high.
Unlike many speculative AI stocks, Palantir is already highly profitable. The corporate converts 37% of its revenue into free money flow, adding to a balance sheet with $4.5 billion and 0 debt. Plus, the business is comfortably profitable under generally accepted accounting principles (GAAP). Palantir’s rise shouldn’t surprise anyone; it is a highly profitable, fast-growing AI innovator.
Palantir’s only problem is that its shares have gotten too far ahead of the business. The stock price has grown over 900%, but the corporate hasn’t. Today, Palantir trades at a PEG ratio of 5. It’s a superb business, but I don’t love paying beyond PEG ratios of two to 2.5 for even the most effective stocks. Investors probably shouldn’t expect the stock to maintain rising prefer it has until the valuation cools off a bit.
Social media giant Meta Platforms is the biggest company on this list (by far), with a $1.5 trillion market capitalization. Still, the corporate has the financials to back it up. Meta generates over $156 billion in annual revenue and over $50 billion in money flow. Its primary business is digital promoting, monetizing the billions of people that use Facebook, Instagram, WhatsApp, and Threads.
Meta is deeply involved in AI technology, including massive data center investments, an open-source AI model (Llama), and a whole business unit dedicated to AI and metaverse services and products (Reality Labs). Meta has already developed AI tools to assist advertisers get more from their ad spend, increasing Meta’s pricing power and driving growth within the core business.
The stock’s PEG ratio is simply 1.3 today, so Meta’s valuation could expand further before becoming a priority. Meanwhile, analysts estimate that Meta will grow earnings by 18% annually over the long run. Investors may not see one other 400% run over the following two years, but 40% to 50% seems possible. That would keep Meta on its market-beating trajectory for some time longer.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Idiot’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Meta Platforms and Palantir Technologies. The Motley Idiot has a disclosure policy.