There's no question that Nvidia has been the belle of the artificial intelligence (AI) ball on the stock market this year.
Shares of the chipmaker, best known for its graphics processing units (GPUs), have soared this year; they've nearly tripled, blowing away analyst expectations in the company's last two quarters.
While most of its semiconductor peers are struggling with cyclical headwinds, including an inventory glut and lower prices as pandemic effects rolled off, Nvidia's sales have skyrocketed. The chart below shows how quickly Nvidia's business has responded to demand for AI chips:
Profits are also soaring, as Nvidia has a clear technological advantage in AI chips. Not surprisingly, Wall Street has firmly lined up behind the stock. Of the 38 analysts covering the stock, 37 call it a buy (the lone exception rates it a hold), and the average analyst sees Nvidia stock gaining 56% over the next year.
Nvidia could get there, which would mean adding more than $500 billion in market cap. But competition in AI chips is expected to intensify. And the semiconductor sector is notoriously cyclical, so strong demand won't last forever, especially in a rapidly evolving space like AI.
For investors looking for another option in AI stocks, there's an under-the-radar small cap that has a lot of upside potential.
Image source: Getty Images.
Meet this adtech star
Perion Network (PERI +1.88%) is a small-cap adtech company based in Israel that has crushed the broad market and the adtech sector recently. Over the last three years, its stock is up more than 200%, bucking the broader headwinds in digital advertising, and it was the only adtech stock to post gains last year.
The company's primary business is its intelligent hub, which uses AI and machine learning technologies to connect ad buyers with sellers and optimize ad transactions for both sides. Both the success of that product and much of its competitive advantage come from Perion's AI and machine learning technology.
Additionally, Perion makes premium ad products that allow customers to run ads during live events like sports. And it offers a "connected cart" that will adjust the product advertised based on available retail inventory or a factor like weather. The company also has a partnership with Microsoft, which uses Perion's technology to help optimize ads on its Bing search engine.
Recent results have been strong, with revenue up 22% in the second quarter, and 45% growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Perion also raised its guidance for the year, and now sees revenue growth of 16% and adjusted EBITDA increasing 26%.
Perion has grown both organically and through acquisitions, but CEO Tal Jacobson, who took the helm earlier this year, has big ambitions for the company. In an August interview, he told me: "Our aim is to become one of the biggest companies in the adtech space. In order for us to do that, we need to buy more technologies and more companies." In other words, Perion has no plans to slow down.
NASDAQ: PERI
Key Data Points
The price is right
Perion stock has long looked undervalued, which is part of the reason it's tripled over the last three years. More recently, the stock has come down from its peak a few months ago, due to some skepticism that it can maintain its strong growth rate amid geopolitical concerns.
As a result, the stock trades at a price-to-earnings (P/E) ratio of just 11, which significantly underprices its growth potential.
Perion should also benefit from a rebound in advertising spending over the next year or two. The company's market cap is just $1.2 billion. If it can press its AI advantage in the coming years, the stock could easily be a multibagger from here.
