Jessica Heygate
Updated on: October 13, 2024 1:55 pm GMT
As the artificial intelligence (AI) market continues to surge, some investors find themselves hesitant, watching stocks tumble from their highs. With projections estimating the AI market will skyrocket to $1.8 trillion by 2030, many are left wondering if now is the time to capitalize on potential bargains among declining AI stocks.
AI Stocks in the Downturn
Despite the optimistic outlook for AI technologies, several stocks have plummeted over 50% from their peaks in the past year. Investors are now examining whether these discounted shares might provide a lucrative opportunity. Three key players to consider are Super Micro Computer, Snowflake, and SoundHound AI.
- Super Micro Computer (NYSE: SMCI)
- Snowflake (NYSE: SNOW)
- SoundHound AI (NASDAQ: SOUN)
Each of these companies has experienced sharp declines, yet they may still hold promise for those willing to take the risk.
Super Micro Computer: A Contrarian Bet?
Super Micro Computer, often referred to as Supermicro, was once celebrated as a leading AI stock. However, its recent struggles have raised eyebrows. Following its fiscal 2024 Q4 earnings release, concerns surfaced after a report from Hindenburg Research questioned the company’s accounting practices. As a result, Supermicro’s stock has dropped about 60%, now trading around $450 per share, down from a 52-week high of $1,229.
Despite this turmoil, the company has demonstrated robust growth, especially in providing servers and IT infrastructure crucial for AI advancements. For the fiscal year ending June 30, Supermicro reported astounding sales of $14.9 billion, reflecting a 110% increase year-over-year, and profits surged from $640 million to $1.2 billion.
However, investors remain cautious due to a noticeable decline in gross margins. As seeming excessive doubts overshadow the company’s impressive growth story, traders may find Supermicro to be a worthwhile gamble, balancing risk and potential reward.
Snowflake: Struggles and Setbacks
Snowflake, a notable data storage company, faces its own set of challenges. The stock has fallen more than 40% year-to-date, continuing its decline since reaching its peak in late 2021. This downturn coincided with the unexpected retirement of the company’s CEO and a significant data breach affecting major clients.
While Snowflake’s revenue has been growing, its worsening losses raise significant concerns. In the first half of this year, the company reported an operating loss that surged by 26% year-over-year, reaching $703.9 million. Management’s reduced margin guidance for the fiscal year only adds to investors’ apprehensions. Unless Snowflake can demonstrate a clearer path to profitability, it may be prudent to avoid this stock for now.
SoundHound AI: Competing in a Crowded Space
SoundHound AI has had a rollercoaster ride this year, with its stock initially spiking on news of an investment from Nvidia. Even after a subsequent decline of 52% from its high of $10.25, the stock remains up about 130% for the year. SoundHound creates voice AI technology designed for businesses, particularly in the restaurant sector.
Despite this growth, the company faces intense competition, and its market presence appears limited. In its recent financial report, SoundHound’s revenue increased by 54% to $13.5 million; however, losses ballooned by 60% to $37.3 million. With such uncertainty surrounding its future performance, potential investors should weigh the risks carefully.
A Better AI Investment?
While investors contemplate stocks that have faced declines, many analysts are advocating for a different approach: looking to companies with a more stable growth trajectory. One such stock gaining attention is Alphabet Inc., the parent company of Google.
Alphabet has established itself as a formidable player in the AI landscape, having developed AI-powered features long before the recent surge sparked by ChatGPT. The company’s diverse ventures range from medical research to autonomous driving, all while underpinned by its extensive data infrastructure and innovation capabilities.
Despite its relevance in the AI sector, Alphabet’s stock has not experienced the same meteoric rise as some of its competitors. With a trading valuation at 23 times earnings and 6 times sales, analysts argue that Alphabet is attractively priced compared to its growth rate of 18% over the past five years.
Investing in Alphabet: Key Considerations
Investors eyeing Alphabet as a potential AI investment should consider several factors:
- Long-Term Stability: Alphabet offers a resilient business model with diverse revenue streams.
- Strong Growth Potential: The company is well-integrated into the booming AI market, making it a likely candidate for future gains.
- Affordability: Currently, Alphabet’s shares are modestly valued, suggesting opportunity for investors.
Given these strengths, Alphabet is emerging as an appealing alternative for those looking to invest in the AI space without the associated volatility of riskier stocks.
Conclusion
The landscape of AI stocks presents both challenges and opportunities as companies navigate the market’s ups and downs. Stocks like Super Micro Computer, Snowflake, and SoundHound AI may offer potential for recovery, but they come with significant risks. On the other hand, Alphabet stands out as a more stable option worthy of consideration as the demand for AI technology continues to grow.
Investors who want to take advantage of the growing AI market need to do their homework and choose wisely. This will help them make smart choices in the next few months.
