2 Artificial Intelligence (AI) Stocks to Buy Now and Hold for the Long Term

By | March 29, 2024

Since the popularity of artificial intelligence (AI) early last year, investors have been fascinated by the possibility that AI stocks could go parabolic. To take SoundHound AI For example. Since reports came out in mid-February Nvidia (NASDAQ: NVDA) owned a stake in the company, its shares soared, rising as much as 295% in the weeks that followed.

Investors should be careful, however, because following the herd can be costly. SoundHound AI has fallen out of favor with at least one former bullish analyst and has been the target of a short report that raises several valid concerns. Furthermore, SoundHound AI is selling for 18 times next year’s revenue and, despite impressive growth, has yet to generate any profits.

That’s not to say this investment won’t ultimately be a winner, but given the risky nature of this company, I would suggest investors forget about SoundHound AI stock and look at these two AI leaders instead.

A person staring intently at a stock chart on a tablet.

Image source: Getty Images.

1. Nvidia

When it comes to AI, there’s a compelling argument that no other company is better positioned to ride the AI ​​wave than Nvidia itself. The company adapted its technology years ago to accelerate AI models and is the undisputed leader in powering machine learning algorithms, with an estimated 95% market share, according to New Street Research.

As a result, Nvidia already had a wealth of experience when generative AI arrived on the scene early last year. The company adapted its processors to provide the computing power needed to run AI systems, and sales took off.

For the fourth quarter of 2024 (ended January 28), Nvidia delivered record revenue that rose 265% year over year to $22.1 billion, driving adjusted earnings per share (EPS) up 486% to $5.16. This was the third consecutive quarter of triple-digit year-over-year growth – and it likely won’t be the last. For the current quarter, management forecasts record revenue of $24 billion, up 234% year over year.

There are even more reasons to believe that Nvidia’s growth spurt will continue. Much of AI processing and workloads takes place in the cloud, and Nvidia has an advantage there too. According to CFRA stock analyst Angelo Zino, the company has a market share estimated at 95% of graphics processing units (GPUs) used in the data center space.

The build-out of data centers that can perform AI processing has already begun. CEO Jensen Huang suggests that the expenditure needed to bring data centers up to standard will double to $2 trillion in the coming years.

Nvidia isn’t exactly cheap at 38 times forward earnings, but it has earned the premium thanks to triple-digit growth.

Why not just buy Nvidia itself instead of buying the shares that Nvidia bought?

2. Super microcomputer

Another company that is already reaping the benefits of the accelerated adoption of generative AI is Super microcomputer (NASDAQ:SMCI), commonly called Supermicro. The company is also playing a major role in AI processing and is developing the servers that are robust enough to handle the AI ​​workload.

The company has partnered with Nvidia, Advanced micro devicesAnd Intel, among other things, to ensure that its servers are optimized to run with the latest and most robust processors. Additionally, these partnerships ensure that Supermicro has a steady supply of AI-centric chips to power its servers.

For the second quarter of fiscal 2024 (ended December 31, 2023), Supermicro generated net sales of $3.66 billion, which increased 103% year over year, delivering adjusted earnings per share of $5.59, an increase of 71%. Management was clear that the record revenue was the result of strong demand for rack-scale systems used for AI.

There are those who believe that Supermicro is taking market share from its rivals. Barclays analyst George Wang said Supermicro “has a 7% market share globally, implying further market share gains are likely.” He further suggests that Supermicro is stealing stock Dell Technologies And Hewlett Packard Enterprise.

Additionally, the aforementioned data center upgrade cycle also benefits Supermicro. Bernstein analyst Toni Sacconaghi has calculated that the AI ​​server market will grow 75% annually over the next three years, calling the resulting expansion “unprecedented.”

Supermicro shares are up 842% in the last year (at the time of writing), but are still remarkably cheap at less than three times next year’s sales.

Given its low valuation and earnings history, Supermicro is a much better AI stock than SoundHound AI.

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Danny Vena holds positions at Nvidia and Super Micro Computer. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. 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 May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

Forget SoundHound AI: 2 Artificial Intelligence (AI) Stocks to Buy Now and Hold for the Long Term originally published by The Motley Fool

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