The rapid growth of the artificial intelligence (AI) market drove many stocks to record highs over the past few years. That's why shares of Nvidia, the chipmaking bellwether of that booming market, surged 2,760% over the past five years.
Some investors might be reluctant to chase those breakneck gains, but plenty of overlooked AI stocks could still go parabolic in the future. Let's take a look at three stocks that fit this description: Innodata (INOD +7.85%), MicroStrategy (MSTR +11.88%), and Lumen Technologies (LUMN +0.70%).
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1. Innodata
Innodata was once considered a slow-growth IT services and enterprise software company. However, its stock soared from about $1 at the end of 2019 to about $32 today. That massive rally was the result of an AI-driven acceleration in its top line.
NASDAQ: INOD
Key Data Points
Revenue rose 10% in 2023. But in the first nine months of 2024, sales soared 83% year over year to $111 million as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 266% to $20 million. It also turned profitable on the basis of generally accepted accounting principles (GAAP). That explosive growth stemmed from its rollout of generative AI tools for five of the "Magnificent Seven" companies.
For the full year, Innodata expects its revenue to soar in the range of 88% to 92% as more companies adopt its generative AI services. From 2024 to 2026, analysts expect its sales to have a compound annual growth rate (CAGR) of 25% as its adjusted EBITDA experiences a CAGR of 29%.
Those are stellar growth rates for a stock that trades at 4 times next year's sales and 37 times its adjusted EBITDA. Innodata has already had a great run over the past five years, but it could head even higher as it locks in more big tech companies with its data processing and AI capabilities.
2. MicroStrategy
MicroStrategy was once dismissed as a slow-growing enterprise software company, then it started to hoard Bitcoin in 2020. At the end of its latest quarter, it held 252,220 of the digital tokens with a current market value of $19.26 billion. That's nearly a third of MicroStrategy's enterprise value of $59.1 billion.
NASDAQ: MSTR
Key Data Points
The bulls believe MicroStrategy's hoarding strategy will pay off if the top cryptocurrency's price skyrockets over the next few years. In theory, the rising value of its Bitcoin holdings could offset the slower growth of its enterprise software business.
However, MicroStrategy is also a generative AI company. Last October, it rolled out MicroStrategy AI, a platform that enables companies to integrate generative AI features into their existing data applications. It expects those new features, along with the transformation of its on-site applications into cloud-based services, to stabilize the growth of its core software business as it accumulates more crypto.
Analysts only expect MicroStrategy's revenue to have a CAGR of 1% from 2023 to 2026, as it stays unprofitable on a GAAP basis. But the value of its Bitcoin holdings could keep growing -- and its generative AI business could experience a sudden growth spurt like Innodata if it locks in more customers.
3. Lumen
Lumen, the telecom company formerly known as CenturyLink, suffered five consecutive years of revenue declines. It was also unprofitable over the past two years and suspended its dividend in 2022. That's why its stock price dropped below $1 this June.
NYSE: LUMN
Key Data Points
Unlike many of its telecom peers, Lumen didn't expand into the wireless market to reduce its dependence on wireline connections. Instead, it doubled down on the slow-growth wireline market and bundled more cloud, security, and collaboration services with its business wireline plans.
It also expanded into the higher-growth fiber market. Lumen originally expected to generate slow but stable growth as economies of scale kicked in, but its declining business wireline revenue consistently offset its rising fiber revenue. As a result, its rising costs overwhelmed its declining revenue and its losses widened.
But over the past few months, Lumen struck a series of AI connectivity deals worth $5 billion -- including one to upgrade the data center infrastructure of Microsoft's Azure cloud platform to handle more generative AI applications.
Those new deals lit a fire under Lumen's stock and drove it back to about $9. But even after that rally, its enterprise value of $25.5 billion is less than 2 times higher than its projected sales for 2024. Analysts expect its revenue to decline again in 2024 and 2025, but its new AI contracts could help it clear those low expectations. If that happens, Lumen's stock could go parabolic as it attracts more value-seeking investors.
