The artificial intelligence (AI) space is growing rapidly, with predictions that the AI market could reach trillions of dollars in value over the next decade. AI is transforming industries such as healthcare, retail, manufacturing, technology, finance, and more, by automating processes and unlocking new levels of productivity.
Growth stocks, and particularly those in the AI space, are reinvesting their profits back into the business to fuel future innovation, resulting in long-term growth trajectories. Companies such as Palantir Technologies (PLTR) and Soundhound AI (SOUN) have reported strong earnings as AI technologies become more widely adopted. This has boosted investor confidence, resulting in significant stock price appreciation so far this year.
Here's why these stocks are still good picks to buy and hold right now.
Growth Stock No. 1: Palantir Technologies
With a market cap of $81 billion, Palantir Technologies (PLTR) is a software company best known for its data analytics and AI platforms, which primarily serve government agencies and large enterprises.
Palantir's stock price has risen dramatically in recent months, bolstered by a string of strong earnings reports and an increased focus on AI-driven products. The stock has surged 113.7% year-to-date, outpacing the S&P 500 Index’s ($SPX) gain of 19.4%.
Palantir AIP, or Artificial Intelligence Platform, has secured a balanced mix of government and commercial contracts, boosting revenue.
Palantir's close ties with U.S. government agencies, such as the Department of Defense and the intelligence community, remain a cornerstone of its business. It has also been expanding its global footprint, signing contracts with foreign governments and multinational corporations.
This diversification reduces the risks associated with relying only on U.S. government contracts. Its AIP platform has proven useful in fields such as national security, intelligence analysis, and military operations, generating a consistent stream of high-margin revenue.
The government sector accounted for 54.7% of total revenue in the second quarter, which rose by 23% year on year to $371 million.
To reduce its reliance on only government contracts, the company has been expanding its commercial segment. The company's Foundry platform has gained popularity in industries such as healthcare, finance, and manufacturing. Palantir's partnerships with IBM (IBM), Microsoft (MSFT), Oracle (ORCL), PwC, and others are allowing it to reach a larger customer base.
Its commercial customer base in the U.S. increased by an impressive 83% year on year. Palantir currently has over 295 customers in the U.S. alone, and the commercial segment's revenue increased by 33% in Q2.
Palantir also reported a record GAAP (generally accepted accounting principles) profit of $0.06 per share, a 500% increase over the same period last year. The company expects to report GAAP profits in the remaining quarters of 2024.
The company ended the quarter with $4 billion in cash, cash equivalents, and short-term U.S. Treasury securities. Palantir generated $149 million in free cash flow (FCF) in Q2, maintaining a healthy cash position. It expects to generate FCF of around $800 million to $1 billion for the entire year, which is critical for funding future growth initiatives.
Despite its noteworthy gains and improving financials, Wall Street rates PLTR stock a “hold” overall, with many skeptics citing its high valuation. Palantir stock is currently trading at a premium, valued at 84x forward 2025 earnings.
Analysts who follow the stock expect revenue to rise by 23.9% in 2024 and 20.3% in 2025. Earnings are expected to rise by 42% in 2024 and 21.4% in 2025.
Despite its high valuation, Palantir's continued investment in AI, expansion into commercial markets, and emphasis on profitability are all encouraging signs for long-term investors. The company has numerous opportunities in the commercial sector and could be an excellent long-term play for patient investors.
Of the 15 analysts who cover PLTR, two recommend a "strong buy," one rates it a "moderate buy," five say it’s a "hold," one rates it as a “moderate sell,” and six rate it as a “strong sell.”
Palantir has surpassed its mean price target of $25.69. Its high target price of $50 indicates an upside of 35.5% over the next 12 months.
Growth Stock No. 2: Soundhound AI
SoundHound AI (SOUN) is a pure-play voice AI company that provides speech recognition and voice-enabled solutions across multiple industries.
The Houndify platform, which serves as SoundHound's core technology, enables voice recognition, natural language processing, and speech-to-meaning capabilities. Its clients include major corporations such as Mercedes-Benz, Hyundai, Samsung, Nvidia (NVDA), Qualcomm (QCOM), and Pandora, exhibiting the company's reach across multiple industries.
With a market cap of $1.59 billion and trading below $5, Soundhound is a penny stock with outstanding long-term prospects in the voice AI industry. SOUN stock has gained an impressive 137% YTD, outperforming the broader market.
Total revenue in the second quarter rose by 54% year on year to $13.5 million, while the GAAP gross margin stood at 63%. The company's total subscription and booking backlog increased by $723 million from the previous year's quarter. Booking backlog refers to the contractual revenue that the company may realize in the future.
Despite strong revenue growth, Soundhound remains unprofitable because it continues to invest heavily in R&D, marketing, and strategic investments, just like any other growth stock. In Q2, adjusted net losses stood at $0.04 per share. However, losses narrowed from $0.07 per share a year ago.
Soundhound made some strategic acquisitions in the quarter to grow its business. That includes the acquisition of Amelia, a leading enterprise AI software company, and Allset, an online ordering platform. Management believes that these acquisitions will expand its conversational AI services into new industries, while also driving profitability by 2025.
Despite its strategic expansion plans, the company's balance sheet remains strong. In Q2, its cash balance stood at $201 million after paying off $100 million in debt.
The company now expects to exceed $80 million in revenue in 2024 and $150 million in 2025. Similarly, analysts expect Soundhound's revenue to rise by 79.9% in 2024, and then by 84.2% in 2025. Furthermore, analysts expect losses of $0.35 per share in 2024, eventually falling to $0.21 in 2025.
SOUN stock appears to be overvalued, trading at 20x forward estimated sales for 2024. However, due to its early mover advantage, the company has a competitive edge in the AI customer service market. Its strategic acquisitions and international expansions in various industries may continue to boost its financial performance.
Overall, SOUN stock is a “strong buy” on Wall Street. Of the six analysts who cover SOUN, five recommend a "strong buy," and one rates it a "hold." Its mean price target of $7.58 suggests expected upside of 34% from current levels. Furthermore, the Street-high target price implies of $9.50 indicates an upside potential of 90% over the next 12 months.
