What was the top financial story of 2023? It has to be Artificial Intelligence (AI), right?
No other subject dominated the headlines quite like AI. Whether it was ChatGPT, viral AI-generated images, or the failed ouster of Sam Altman at OpenAI, it seems AI keeps pumping out big stories, one after the other.
So, with 2024 right around the corner, here are three AI stocks worth owning in 2024 -- and beyond.
Image source: Getty Images.
AI analysis can help companies optimize their operations
Jake Lerch (Palantir Technologies): With the stock up 178% year to date, 2023 has been an incredible year for Palantir Technologies(NYSE: PLTR) and its shareholders. There are, however, signs that 2024 (and beyond) could be even better.
Palantir operates AI-based analytics systems for governmental and commercial uses and is on the leading edge of translating AI innovation into shareholder returns. Consider Palantir's recent announcement that it is extending its long-standing partnership with UniCredit S.p.A., a major European bank.
In its press release , Palantir noted that its signature Foundry operating system delivered material results for UniCredit. For example, in 2023, "advanced analytics and propensity models in Foundry helped [UniCredit] generate a four-fold increase in customer redemption of protection products through better targeting."
Indeed, UniCredit is just one of many customers that is desperate to ramp up its use of AI to streamline its operations. In a Dec. 7, 2023 interview with Fox Business, Palantir co-founder and CEO Alex Karp said, "We just can't keep up with our product demand...We are just breaking at the seams in the U.S."
The numbers certainly back that statement up. In its most recent quarter (the three months ending on Sept. 30, 2023), Palantir grew revenue by 17% year over year. Trailing-12-month revenue hit $2.1 billion, gross profit swelled to $1.7 billion, and free cash flow increased to $474 million.
PLTR Revenue (TTM) data by YCharts
Nevertheless, Palantir stock isn't for everyone. Since the company is still early in its lifecycle, its stock will be volatile. Indeed, shares plummeted more than 84% from their all-time high between January 2021 and January 2023.
Still, for long-term, growth-oriented investors, Palantir is a name worth considering, given the soaring demand for its products and its improving fundamentals.
AI isn't just about what you see; it's about what you say and hear
Justin Pope (SoundHound AI): Much of the hype around AI has focused on large language models like ChatGPT, but there are other ways to use AI that investors may not be fully aware of. SoundHoundAI(NASDAQ: SOUN) develops conversational AI, taking an audio input, such as someone voicing a question and responding with dialogue or action.
Conversational AI has a lot of existing and potential use cases. SoundHound AI is used in restaurant and hospitality industries to take orders or make reservations. It's in vehicles, smart devices, and appliances for voice assistance. In the future, the technology could find its way into healthcare, customer service, and more. SoundHound AI estimates a long-term potential addressable market of $160 billion.
As a company, SoundHound AI is just getting started. It's only done $38 million in revenue over the past 12 months, but analysts believe it will grow significantly. Estimates call for 50% revenue growth over the next two years. The company also recently announced an acquisition of SYNQ3 Restaurant Solutions, giving SoundHound access to a potential restaurant pipeline of 100,000 locations.
SoundHound AI is a risky stock because the business is so nascent. It's burning cash every quarter, and there is only a year or so of cash on the balance sheet at this rate. Investors shouldn't be shocked if the company issues new stock to raise funds. Conversely, the stock's market cap is just $480 million. Investors could eventually be handsomely rewarded if SoundHound AI can become a leader in this massive (but underrated) niche within AI.
It's way too early to count out this "AI-first" company
Will Healy(Alphabet): The narrative in the AI space seems to have turned away from Google parent Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG).
Indeed, the rise of OpenAI's ChatGPT seemed to catch Alphabet off guard, particularly as rival Microsoft (NASDAQ: MSFT) forged an alliance with the research and development company. This gave users a reason to start using Microsoft's search engine, Bing, and some began questioning the dominance of the Google search engine for the first time in several years.
However, Alphabet has responded with its own generative AI tool called Bard. While the tools offer similar results, Bard was first in producing more up-to-date results as it leverages Google's search engine.
Moreover, the company has a long history with AI. Alphabet first used AI to correct spelling as early as 2001. The tools advanced from that point, so much so that Alphabet declared itself an "AI first" company in 2016.
Furthermore, investors should remember that Alphabet owns numerous companies, some of which could drive AI innovation. Earlier this year, it combined two of its AI companies into Google DeepMind. This subsidiary is a group of scientists, engineers, and others researching AI.
Also, with the funding backing Google DeepMind, the company has a high probability of driving innovation. Alphabet claims almost $120 billion in liquidity, and it generated nearly $32 billion in free cash flow in the first nine months of 2023. This gives the company tremendous resources to develop AI-related products and the ability to purchase the innovation it cannot create.
Such optionality gives investors fewer reasons to doubt Alphabet, and one has to wonder whether the sentiment against the Google parent was overblown. Despite the concerns of some, the stock has risen by more than 40% over the last 12 months.
GOOGL PE Ratio data by YCharts
Additionally, the increase has taken its P/E ratio to 26. While not inexpensive, its P/E is lower than those of Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), and Microsoft. That lower valuation could be an opportunity to buy this stock as it uses its AI knowledge base and vast resources to remain a force in the artificial intelligence industry.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jake Lerch has positions in Alphabet and Amazon. Justin Pope has no position in any of the stocks mentioned. Will Healy has positions in Palantir Technologies. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, and Palantir Technologies. The Motley Fool has a disclosure policy.
