The rapid adoption of artificial intelligence (AI) has been gathering steam over the past year, but there's been a notable uptick in AI-related developments over the past several weeks. Since the start of February alone, shares of Palantir Technologies (PLTR 3.73%) have jumped 55%, Super Micro Computer (SMCI 8.89%) surged 72%, Arm Holdings (ARM 4.11%) soared 90%, and SoundHound AI (SOUN 5.77%) skyrocketed 121% as of the market close on Thursday.
The common thread that runs through these companies is the accelerating adoption of AI. There wasn't a single development that drove these stocks higher, but rather the growing tidal wave of AI that's beginning to overtake the tech industry.
Let's look at what drove each of these stocks higher and what it all means for the future.
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Show me the money
It wasn't just the growing secular tailwinds of generative AI that drove these stocks higher. Three of the four recently reported quarterly financial results that easily surpassed investor expectations.
Supermicro was first out of the gate, reporting the results of its fiscal 2024 second quarter (ended Dec. 31, 2023). The company generated revenue of $3.7 billion, up 103% year over year and 73% sequentially. Management cited record and accelerating demand for AI servers. Profit was equally spectacular, with adjusted earnings per share (EPS) of $5.59 rising 62%. If that weren't enough, the company is forecasting full-year revenue of $14.5 billion at the midpoint of its guidance, which would represent 100% growth.
Next up was Palantir Technologies. For the fourth quarter, revenue of $608 million marked a 20% jump year over year and 9% sequentially, fueled by a 70% jump in U.S. commercial revenue. This performance helped the company generate its fifth consecutive quarter of profit according to generally accepted accounting principles (GAAP), with adjusted EPS of $0.08. The headline was the forecast for at least 40% growth from its U.S. commercial business over the coming year, thanks to robust demand for its Artificial Intelligence Platform, Palantir's generative AI solution.
Most recently, Arm Holdings delivered eye-opening results. For its fiscal 2024 third quarter, Arm generated record revenue of $824 million, up 14% year over year, driven by license revenue that grew 18% and record royalty revenue that climbed 11%. This performance resulted in adjusted EPS of $0.29, rising 32%. It was the company's forecast that really caught Wall Street off guard. Management is guiding for fourth-quarter revenue in a range of $850 million to $900 million, or growth of between 34% and 42%, lunging past the third quarter's 14% growth.
What these companies have in common, aside from the obvious ties to AI, is that each company delivered a "beat and raise" quarter, defying expectations and providing guidance that outpaced Wall Street's already bullish expectations.
Data by YCharts
The godfather of AI takes stock
There's a strong argument to be made that Nvidia saw the writing on the wall and positioned itself for the AI boom to come. Investors need only review the company's recent results to understand the magnitude of the secular tailwind involved.
For Nvidia's fiscal 2024 third quarter (ended Oct. 29, 2023), the company delivered record revenue that jumped 206% to $18.1 billion, resulting in diluted EPS that surged 1,274% to $3.71.
So when Nvidia makes a notable move in the field of AI, investors take notice.
In a regulatory filing with the Securities and Exchange Commission on Wednesday, Nvidia revealed that it had taken stakes in several AI-related companies, causing a spike in their respective shares.
Nvidia purchased 1.73 million shares of SoundHound AI, which provides voice-controlled AI solutions for businesses, in a stake valued at $6.5 million as of Thursday's market close. The company's technology has been deployed by a number of high-profile restaurants, including White Castle and Jersey Mike's, to power voice-enabled phone and drive-through ordering. It's also one of the leading providers of voice-AI solutions to carmakers, counting more than 20 automotive brands on its customer list.
SoundHound wasn't the only one. Nvidia finally confirmed the size of the stake it took in Arm Holdings: It owns 1.96 million shares worth roughly $262 million. Arm provides the designs behind some of the world's most widely used central processing units. After two years in the making, regulators quashed an attempted merger between Nvidia and Arm in early 2022.
Some viewed these purchases as a significant vote of confidence from Nvidia. As a result, many investors followed suit, piling into the stocks.
Data by YCharts
The cost isn't as high as you might think
The most common bear argument for investing in these and many AI stocks is the valuation. That view is understandable but tends to ignore the stunning growth rates of the companies in question. It reveals the limitations involved in using the price-to-earnings ratio or the price-to-sales ratio, especially when using them in a vacuum.
When dealing with high-growth stocks, the more appropriate measure is the price/earnings-to-growth (PEG) ratio, as it takes the growth rate of the company's profit into account. Since SoundHound AI isn't yet profitable, the point is moot. However, for Arm Holdings, Super Micro Computer, and Palantir Technologies, they clock in with forward PEG ratios of 0.8, 0.5, and 0.3, all well below the level of 1, which is the standard for an undervalued stock.
From that perspective, Arm Holdings, Super Micro Computer, and Palantir Technologies are not only growing quickly but are also cheaper than you might think.
