SoundHound AI has been red-hot on the stock market in 2024, with stunning gains of 288% so far. Investors have been buying shares of this voice artificial intelligence (AI) solutions provider hand over fist based on the belief that it could become the next big AI play.
The company’s revenue has been growing at an impressive pace, and it also boasts of a solid pipeline that could help it sustain its red-hot growth in the future. What’s more, SoundHound AI stock has got a vote of confidence from AI pioneer Nvidia (NASDAQ: NVDA), which has a small stake in the company. This is a big reason why shares of SoundHound have simply taken off in the past month or so.
However, investors looking to buy an AI stock right now may not be comfortable paying 42 times sales for SoundHound, which is way higher than the tech sector’s average of 7.1. Of course, it may become a key player in the AI market in the long run, but SoundHound AI is currently quite small, and is far from being profitable. Instead, investors would do well to buy shares of the following two established AI companies, which appear to be undervalued.
Hidden Gem #1: Nvidia
You may be wondering how Nvidia is an undervalued AI stock — it is trading at 36 times sales, which isn’t very cheap when compared to SoundHound. But a closer look at how fast Nvidia has been growing will make it clear that investors are indeed getting a good deal on the stock right now.
Nvidia’s revenue in the fourth quarter of fiscal 2024 (for the three months ended Jan. 28, 2024) jumped a whopping 265% year over year. Its adjusted earnings grew at a faster pace of 486% year over year to $5.16 per share. For comparison, SoundHound AI’s revenue was up 80% year over year in the previous quarter to $17.1 million, while its adjusted loss halved on a year-over-year basis to $0.07 per share.
What’s even more impressive about Nvidia is that the chipmaker’s outstanding growth is probably here to stay. Its revenue guidance of $24 billion for the first quarter of fiscal 2025 means that Nvidia’s revenue is on track to more than triple once again from the year-ago period’s level of $7.2 billion. Analysts have been quick to raise their growth estimates. They expect Nvidia’s earnings to nearly triple in the space of just three fiscal years from fiscal 2024 levels of $12.96 per share.
NVDA EPS Estimates for Current Fiscal Year data by YCharts
This prediction of rapid growth in Nvidia’s earnings is precisely the reason why the stock is trading at attractive forward earnings multiples. This is evident from the chart below:
NVDA PE Ratio data by YCharts
At 30 times its fiscal 2027 earnings, buying Nvidia stock is a no-brainer right now, as it is trading almost in line with the Nasdaq-100’s forward earnings multiple of 29 (using the index as a proxy for tech stocks). Another clear indicator of Nvidia’s undervaluation is its price/earnings-to-growth ratio (PEG ratio) of just 0.13; this is a forward-looking valuation metric that helps understand how cheap a stock is relative to the growth it is expected to deliver.
Traditionally, a stock with a PEG ratio of less than 1 is undervalued. Nvidia’s PEG ratio is well below that mark. All this indicates that investors should consider buying Nvidia hand over fist, as it is in a solid position to capitalize on the lucrative long-term growth opportunity present in AI chips and deliver healthy gains in the long run.
Hidden Gem #2: Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (NYSE: TSM), popularly known as TSMC, is trading at 10 times sales and 26 times trailing earnings. That means shares of the foundry giant are way cheaper than shares of both Nvidia and SoundHound AI.
Considering the critical role that TSMC is playing in enabling the AI chip revolution, investors would do well to get their hands on the stock before it becomes expensive. After all, Nvidia wouldn’t have been able to run away with the AI semiconductor market without TSMC’s help. Nvidia is a fabless semiconductor company, which means that it simply designs the chips but doesn’t manufacture them. TSMC, Nvidia’s foundry partner, does the actual manufacturing of the AI chips.
It is worth noting that TSMC is the world’s largest foundry company, with a massive share of 61%. That’s well ahead of second-place Samsung’s share of 11%. With the AI chip market predicted to clock 38% annual growth through 2030, TSMC’s dominant position in the foundry space puts it in an advantageous position to capitalize on the growth opportunity on offer.
That’s especially true considering that the leading AI chip players are TSMC’s customers. From Nvidia to AMD to Intel, multiple chipmakers are lining up to buy chips made using TSMC’s advanced manufacturing processes. This is the reason why TSMC is focused on aggressively enhancing its monthly manufacturing capacity of AI chips so that it can meet the growing demand from multiple customers.
As a result, it wouldn’t be surprising to see TSMC growing at a faster pace than the market’s expectations in 2024 and beyond. This is probably why TSMC’s consensus earnings estimates have been heading higher.
Unleashing the Potential: TSMC’s Promising Future Outlook
The Road Ahead for TSMC
As we navigate through the tumultuous waters of the stock market, one company stands out like a lighthouse in the storm – Taiwan Semiconductor Manufacturing Company (TSMC). With projections signaling the possibility of hitting $9 per share in earnings by 2026, investors are eyeing a potential goldmine. If TSMC manages to trade at 29 times earnings by then, mirroring the Nasdaq-100’s forward earnings multiple, brace yourself for a meteoric rise in stock price to $261. This dazzling leap would mark a staggering 91% surge from its current standing.
A Diamond in the Rough
Unlike a fleeing shadow in the dark, TSMC’s current earnings multiple shines brightly below the Nasdaq-100’s average. This variance paints a portrait of a steal for investors diving into the AI stock. The opportunity at hand is akin to stumbling upon a hidden gem in a sea of mediocrity. With visions of impressive gains dancing in the horizon, shareholders might regret letting this chance slip through their fingers over the next three years.
An Investor’s Dilemma: Nvidia or TSMC?
The age-old question traverses the minds of investors – should they place their bets on Nvidia or dare to dance with TSMC? Amidst the swirling whirlpool of uncertainties, wisdom whispers in the ears of those eager souls contemplating their next move. Rather than racing blindly into the arms of Nvidia, take a moment to ponder the sage advice flowing from the Motley Fool Stock Advisor team.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and suggests options like long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short May 2024 $47 calls on Intel. The Motley Fool abides by a strict disclosure policy.