The U.S. stock market saw an impressive surge in late 2023, with the S&P 500 ending the year with a stellar gain of 24.2%. This upward trend continued in early 2024, and the S&P 500 already achieved nine record closing highs in 2024.
Since the S&P 500 has risen over 20% from its October 2022 bear market trough and surpassed its prior peak from January 2022, it is now firmly within a bull market phase. Reuters reports that the index notched an average gain of nearly 260% in the past six bull markets since 1950, so there is much runway left for the S&P 500 in the current bull phase.
Against this backdrop, considering the high level of excitement over artificial intelligence (AI) technologies, it makes sense to pick up shares in high-quality AI-powered companies. Here's why SentinelOne (S +5.12%) and SoundHound AI (SOUN 2.28%) stand out as particularly prudent choices for retail investors now.
SentinelOne
A prominent endpoint security player, SentinelOne helps government organizations and enterprises protect their devices from malicious attacks and cyber intrusions. Shares of the company have gained nearly 70% in the past year, but there is still much upside potential left in the stock.
NYSE: S
Key Data Points
SentinelOne's flagship Singularity security platform is increasingly preferred by clients for its unified endpoint protection, cloud security, and data lake capabilities over multiple-point products and consoles from various vendors. The company had over 11,500 customers at the end of the third quarter of fiscal 2024 (ending Oct. 31, 2023), up 28% on a year-over-year basis. Additionally, the company is increasingly seeing traction with large enterprises, as is evident from a 33% year-over-year jump in the number of customers earning over $100,000 in annualized revenue run rate in the third quarter.
Furthermore, SentinelOne launched a generative AI-powered cybersecurity assistant called Purple AI, which is fully integrated across the Singularity platform, to identify, analyze, and respond to evolving threats. The company already started selling Purple AI to select customers and is expecting to make it generally available in the first quarter of fiscal 2024. Moreover, SentinelOne is also leveraging AI to assess, quantify, and manage risk associated with all executives and management teams of its clients.
SentinelOne's revenue grew 42% year over year in the third quarter, a significant slowdown compared to 105.9% year-over-year revenue growth in the same quarter of the prior year. Despite this, the company is on the path to becoming profitable. SentinelOne has reported the highest record gross margin of 79%, up 800 basis points on a year-over-year basis. This has been driven by increasing scale and improving platform unit economics.
Considering the strong demand trends for SentinelOne's unified Singularity platform, increasing focus on AI-driven security, and rapid progress toward profitability, the company seems a smart long-term pick in 2024.
SoundHound AI
Shares of SoundHound AI jumped 66% in a single day after semiconductor giant Nvidia revealed its $3.7 million stake in the voice and audio recognition software specialist on Feb. 15. While the position does not seem that big, it still highlights the AI chip leader's confidence in the growth prospects of SoundHound's cutting-edge AI-powered voice offerings.
NASDAQ: SOUN
Key Data Points
According to MarketsandMarkets, the conversational AI market is estimated to grow at a compound annual growth rate (CAGR) of 22.6% from $10.7 billion in 2023 to $29.8 billion in 2030. SoundHound AI has carved a niche in this burgeoning market with its advanced voice-enabled AI solutions. The company owns the entire conversational technology stack and is not significantly dependent on third-party application programming interfaces (APIs) -- making the company's solutions more secure, cost-effective, and customizable to client needs.
SoundHound's unique approach to voice recognition, which directly interprets meaning from speech, sets it apart from competitors. Several competitors first transcribe speech to text and then derive meaning from the text. SoundHound's voice solutions have a speed advantage and are more accurate than other competing products. The company estimates its total addressable market to be over $160 billion by 2026, driven by the applicability of its voice offerings across several use cases in multiple industries.
SoundHound has partnered with 20 car brands, including Hyundai and Stellantis. Currently, the company's voice solutions are used in 25% of the automotive units produced globally. Beyond automotive, SoundHound is also expanding into customer service verticals in areas such as restaurants and personal care. The company offers solutions such as smart ordering, smart answering, and visually enhanced SoundHound Dynamic Interaction to multiple businesses to help them engage with their customers more intelligently and efficiently.
SoundHound AI's financial performance also highlights its strength in the conversational intelligence market. Although not yet profitable, the company posted impressive top-line numbers in 2023. The company reported revenue of $29 million in the first nine months of 2023. It has also guided for revenue of $16 million to $20 million in the fourth quarter of fiscal 2023, which implies year-over-year growth of 68.4% to 105.2%. SoundHound also boasts of a substantial bookings backlog of $342 million, which is indicative of a robust revenue trajectory in the coming quarters.
There is no doubt that SoundHound AI is a risky early-stage AI stock, with much to prove in the coming years. However, considering its substantial addressable market, an impressive suite of offerings, and robust financial growth, it makes sense to pick up at least a small piece of this up-and-coming stock even at the current elevated price levels.
