Last week, Nvidia (NASDAQ:NVDA) briefly eclipsed Microsoft (NASDAQ:MSFT) as the world’s most valuable company. The AI chip maker is now worth $3.3 trillion… or roughly the combined value of every residential property in the state of Florida. Shares trade for 50 times forward earnings.
That’s caused expected hand-wringing on Wall Street.
“We’re not necessarily at peak bubble levels,” said Jonathan Stubbs of Berenberg, a wealth management firm, “but there’s definitely a whiff of bubble about it.” Even some InvestorPlace.com writers are getting nervous about high valuations and urging readers to protect their gains by cashing out.
History, however, tells us that we’re only getting started.
“American shares could get pricier still,” The Economist notes. “Pricey shares can always get pricier if investors keep bidding them up… It would probably be closer to the truth to say that just now, for whatever reason, investors seem willing to buy whichever narrative paints the rosiest picture.”
That’s particularly good news for second-wave AI companies — those riding the coattails of Nvidia’s graphics processing unit (GPU) innovations. These are the firms that benefit as AI technologies become more widespread. And they’re the focus of the writers at InvestorPlace.com — our free news and analysis site — this week.
This week, our writers make the case that Nvidia’s meteoric rise is now spawning a whole new cohort of AI winners. Here are their Top three picks for AI stocks on the edge of a massive surge…
Recursion Pharmaceuticals (RXRX)
Drug development has long been a slow, expensive process. Thousands of candidates are discarded in preclinical trials, and even the most promising ones generally fail. Only 3.4% of all cancer-related drugs make it from Phase 1 human trials to final U.S. Food and Drug Administration approval, according to a study by Massachusetts Institute of Technology researchers.
It’s like throwing spaghetti at the wall to see what sticks… at a far costlier scale. Analysts expect the pharmaceutical industry to spend $260 billion this year on research and development.
But what if you could automate that process? What if AI-powered computers become able to model the human body and test how thousands of drug candidates will work?
That’s precisely what Recursion Pharmaceuticals Inc. (NASDAQ:RXRX) seeks to do. As Ian Cooper notes this week at InvestorPlace.com, the Utah-based firm is pioneering a platform that uses machine learning to identify new drugs at scale:
At $9.30, Recursion Pharmaceuticals holds immense potential. With a $50 million investment from Nvidia, the two are working on drug discovery driven by AI.
However, with AI the rate of failure could drop, which is where Recursion Pharmaceuticals comes into play.
“To find the drug and get it into the clinic, I think we can shorten that from five or six years and hundreds of millions of dollars into, perhaps, one or two years and just $10 million or $20 million,” Chief Executive Officer (CEO) Chris Gibson says.
The rise of better computing power (thanks to Nvidia’s latest chips) will enable Recursion to do even more. Last month, the company announced it had completed construction of the Nvidia-powered BioHive-2, the fastest supercomputer in the pharma industry. Such processing speeds will allow digital experiments that previously would have required several months to be performed in parallel in far shorter time frames. And as AI processing power increases, so too should Recursion’s chances for finding the next blockbuster drug.
Stem (STEM)
It’s admittedly been a difficult year for Stem (NYSE:STEM), a company that’s seen shares drop 70% since January. The solar industry has struggled with the phase-out of California’s NEM 2.0 tax breaks, and Stem’s focus on solar monitoring has left it exposed to the slowdown. During the first quarter, management was forced to reduce recorded revenues by $33 million to account for cuts in contract value estimates. First-quarter bookings collapsed to $23.8 million from $636.5 million a year earlier.
However, the selloff now leaves Stem as an incredibly underpriced bet on AI technologies. As Jeremy Flint explains this week at InvestorPlace.com:
Stem’s Athena software is an advanced control system that optimizes the interaction between generators, grid power, renewable energy sources like solar farms and battery storage. An artificial intelligence framework drives the system; Athena autonomously optimizes energy distribution based on variables like weather conditions and energy pricing, making it a pivotal tool for large-scale enterprise clients in managing their sustainable energy resources…
Stem harbors ambitious growth plans that set it apart amid stocks to 20X. The company’s vision, detailed in its “AI and the Future of Energy” white paper, showcases a strategic roadmap for leveraging AI to drive efficiency and advancement across the sustainable energy landscape.
The company also retains an enormous $1.6 billion contract backlog, up 33% from the prior year. Analysts expect the firm to break even on an EBITDA (earnings before interest, taxes, depreciation, and amortization) basis for the first time ever this year.
The success of Nvidia and AI optimism now makes STEM a stock that could rise 20X in the next decade, as Flint notes. The company’s low share price values its equity at just $180 million – a small fraction of its current backlog. And analysts expect strong growth ahead as solar and other clean-energy networks come online. Revenues at Stem are projected to rise almost 30% annually through 2026.
SoFi (SOFI)
Finally, a recent 10% selloff in the past month now puts online banking firm SoFi Technologies (NASDAQ:SOFI) in prime buying territory. Shares trade at $6 – barely above book value.
Thomas Niel now advises InvestorPlace.com readers to buy SoFi’s stock before it sizzles off the market’s back burner:
Wall Street and Main Street investors remain “on the fence” at best, bearish at worst, about the fintech firm and neobank. Burned by past price declines, retail traders have ceased to be excited about SOFI. That’s clear, from the fact that shares barely budged during last month’s short-lived “meme wave.”
Yet while SOFI still hasn’t become a hot stock once again, a resurgence in popularity could still arrive relatively soon. At least, when you consider the next big event for the company and for the stock is just a little over a month away…
The event Niel refers to is, of course, SoFi’s earnings. Analysts expect the company to notch a 16% increase in revenues and flip from negative $0.05 earnings per share to positive $0.01. The company has been riding a wave of higher interest rates, which raises net interest income.
It’s important to note that SoFi is one of the leaders of AI use in retail banking. The firm was an early adopter of AI chatbots for financial advisory. And InvestorPlace.com’s Muslim Farooque notes that SoFi also employs the technology heavily in its underwriting business – something that has helped firms like Verisk Analytics (NASDAQ:VRSK) stay ahead in insurance underwriting.
That suggests SoFi could produce even better figures than expected. Markets have long worried about the quality of the online bank’s loan portfolio, given the firm’s relatively young age and lack of lending history. But lower loan losses (thanks to advancements in AI-assisted lending) could quickly flip the needle on this stock again.
On the date of publication, Thomas Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Yeung is a market analyst and portfolio manager of the Omnia Portfolio, the highest-tier subscription at InvestorPlace. He is the former editor of Tom Yeung’s Profit & Protection, a free e-letter about investing to profit in good times and protecting gains during the bad.