In March 2000, networking giant Cisco Systems (NASDAQ:CSCO) became the most valuable company in the world. No firm had yet mastered making money from the internet, and Cisco’s LAN network switches were the closest thing investors could find.
Of course, Cisco’s shares would eventually fall back to Earth. By 2002, the networking firm had lost 80% of its market value after investors realized they got too far ahead of themselves. It would have been impossible to know that the age of the internet would eventually be dominated by a has-been computer maker (Apple), a widely disliked operating systems firm (Microsoft), a lossmaking e-commerce startup (Amazon), and a 2-year-old search engine that had barely begun selling ads (Google). Facebook’s Mark Zuckerberg was still in high school.
Twenty-three years later, Cisco’s shares remain a third below their dot-com peak.
The same hand-wringing is now happening with AI stocks. Shares of companies like Nvidia (NASDAQ:NVDA) and Arm (NASDAQ:ARM) have risen so quickly that many analysts are now talking about “irrational exuberance” in AI-related valuations. Surely, these stocks can’t keep going up forever?
Yet, two factors suggest that they will… at least in the near term.
- Today’s AI companies (particularly the chipmakers) look more like the computer makers of the 1970s and 1980s than the dot-com companies of the 1990 and 2000s. Unlike the open-sourced internet, early word processors were closed systems where innovators could create proprietary software and stay ahead of competitors. Nvidia’s CUDA software should remind investors of DOS dominance from Microsoft (NASDAQ:MSFT). In other words, there’s a stronger business case for the top AI players this time around.
- Investors have increasingly embraced momentum. Academic studies (and my own MarketMasterAI system) have shown that high-returning companies tend to bring even greater future gains as latecomers rush in. The rise of quantitative funds and social media-based investing has turbocharged this effect. The Top 10 returning S&P 500 stocks from 2023 have already jumped 13% so far this year, versus a 5% average decline in the Bottom 10. Many smaller firms have done even better.
That’s why the writers at InvestorPlace.com – our free news and analysis website – zero in on five surging AI stocks. Though valuations will eventually correct, history tells us to never bet against market mania once it gets started. Might as well enjoy this ride while it lasts…
1. Super Micro (SMCI) +264% YTD
Larry Ramer highlights Super Micro Computer (NASDAQ:SMCI) as a key beneficiary of AI mania:
The stock has a maximum Relative Strength score of 99 and a maximum Accumulation/Distribution rating of A+. Relative Strength measures a stock’s performance compared to the entire market over the last year, while Accumulation/Distribution shows the extent to which institutions have been buying a name over the last 13 weeks.
Ramer also believes more upside is on the way, given Super Micro’s rapid growth. The company helps cloud computing firms install servers, and insatiable demand for AI-related gear has put the Silicon Valley-based company into overdrive. Analysts expect sales to rise another 203% this year, and for earnings to jump 81%. Shares of this high-flying firm have already risen more than 260% this year.
Of course, momentum-based investors need to be increasingly cautious about this AI firm. The stock has recently become a fixture in social media circles, including on Reddit’s r/WallStreetBets and Stocktwits, and that has historically caused extreme volatility on both upward and downward swings.
So, no matter how bullish some of our InvestorPlace.com writers might be, trailing stop-loss orders are essential for preserving your hard-earned wealth when buying these volatile stocks.
2. Arm (ARM) +95% YTD
InvestorPlace writer Charles Munyi believes that even more upside is still ahead for Arm, which has already risen 95% this year.
The company is enjoying AI tailwinds from data-center GPUs and more AI devices. Recently launched edge devices with AI capabilities, like Samsung Galaxy S24 or Google’s Gemini Nano Pixel 6, have boosted revenues. Additionally, on the data center front, training GPUs like the Grace Hopper 200 are running on Arm’s architecture. As AI devices grow, there will be a licensing growth tailwind.
Arm essentially holds a monopoly over chip architecture in smartphone CPUs, which has historically granted the firm a $40 billion-$50 billion valuation. That’s roughly the value Nvidia offered Arm in 2019 in an attempted buyout.
But Arm is now also growing its market share in data centers, which is currently dominated by x86 architecture. The company’s chips are more power-efficient than x86 models, and the trend toward containerized services favors Arm’s efficiency. The rise of electric vehicles, which are power constrained, also offers avenues for growth.
Together, that suggests Arm is worth well into the $150 billion-$200 billion range, well beyond its current market values. The stock could be worth well over $200 per share within several years.
That said, Arm will take a while to justify this valuation. The company currently trades at over 100X forward earnings, so it would need three to four years of hypergrowth to reach this intrinsic value. But by that point, it’s almost certain that Arm will have pushed even further ahead than where it is today.
3. SoundHound (SOUN) +133% YTD
Shares of SoundHound (NASDAQ:SOUN) surged 63% after Nvidia revealed a stake in the voice-recognition company. The stock is now up more than 130% since January, making it the third-best performing AI stock on the market.
Jeremy Flint believes more upside is ahead. He writes how SoundHound could be the next Palantir Technologies (NASDAQ:PLTR):
SoundHound is a small-cap AI stock that may not stay small for long. The company is bringing AI into oft-overlooked fields within voice recognition, like helping restaurant operations improve order flow through AI voice assistance…
Ongoing endorsement from the undisputed overall AI leader indicates that SoundHound has a bright future among AI stocks and could prove to soon be the next Palantir of voice-recognition software.
He also notes that this isn’t the first time Nvidia has bought shares. The chipmaker was also involved in one of SoundHound’s earlier funding rounds in 2017.
Nevertheless, investors should tread carefully (just as they should with every stock in this list). The company earns a D Grade on Louis Navellier’s Portfolio Grader for its history of negative earnings surprises and low profitability. So, investors may want to sell immediately at the first sign of trouble.
4. Nvidia (NVDA) +76% YTD
Shares of Nvidia have surged 76% this year, pushing the company past both Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) by market capitalization.
Chris MacDonald remains bullish on the stock, giving three clear reasons this week at InvestorPlace.com why the world’s dominant GPU maker could push past $1,000 this year.
With the largest AI supply chain, Nvidia faces high demand, leading to a soaring stock price. Plus, with the launch of its H200 chips in 2024, its growth trajectory seems promising…
Nvidia’s pivotal role in the AI realm is attributed to its hefty investment in research and development. Their relentless pursuit of innovation led to groundbreaking GPU architectures tailored for AI, ensuring a competitive edge and adaptability in a dynamic landscape.
My own analysis suggests shares could become worth $1,600 by 2027. Competitors have struggled to catch up with Nvdia’s lead, and the company’s first-mover advantage keeps growing thanks to its proprietary CUDA software.
5. Palantir (PLTR) +42% YTD
I recommended Palantir (NYSE:PLTR) last month here as a stock to buy. Palantir is a behemoth when it comes to government-based work. And the rise of the AI Wars also could trigger interest from corporate America.
Since then, Palantir’s shares have risen on fourth-quarter earnings, bringing its year-to-date gains to 42%. It’s the fifth-best performing AI stock this year.
Louis and his team believe further upside is ahead. In a recent Market360 update, they note that Palantir earns a solid B in Portfolio Grader and say investors should consider buying as opportunities arise.
During the past year, Palantir Technologies has effectively pivoted its primary focus from cybersecurity to AI technology…
Our PLTR stock outlook calls for higher prices down the road, but the near term is hard to predict. Karp created a lot of hype for Palantir Technologies, and the company is richly valued now. So, it’s not a bad idea to start small and slowly if you’re building a Palantir stock position now.
In short, Palantir is a highly profitable company that runs one of the best big-data and AI platforms on the market. Shares trade at roughly a 50% premium to current fair value, but continued growth will help Palantir’s shares fill in that gap within two years.
On the date of publication, Thomas Yeung held no positions in any stock mentioned in this piece. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.