Artificial intelligence mania is still going strong, readily rekindling bullish interest in many of the industry's stocks while continuing to lift others. Investors understand that most of these tickers are already well overvalued. But investors also know these stocks' potential upside is just too promising to worry (much) about valuations just yet. Sometimes you just have to hold your nose and dive in.
To this end, while there are certainly far more AI stocks to consider adding to your portfolio, if you can stomach the risk and volatility, there's some urgency to the idea of stepping into one or more of three of the industry's lower-profile names. Here's a closer look at each one of the three in question.
Arm Holdings
In its early days when modern artificial intelligence was more of an experiment than a commercialized business, power consumption wasn't a concern. Data centers were small enough for their operating costs to not really matter. Developers simply wanted to see if they could make the idea work. And it does.
Now that the AI industry entered its full commercialization phase, though, data center operators are shocked at the sheer size of their utility bills. The U.S. Department of Energy reports that data centers consumed 4.4% of the United States' total electricity production in 2023, for perspective, and is expected to be as much as 12% by 2028. The DOE also explains (in more practical and tangible terms) that the typical data center consumes between 10 and 50 times the amount of power needed by an equally sized ordinary office building.
Enter Arm Holdings (ARM 2.01%).
You may know Arm Holdings as a semiconductor stock, and from a certain perspective, it is. It doesn't actually make chips, though. Rather, it designs them and then licenses its designs to other manufacturers and developers that specifically need its power-efficient IP. The A18 processor found in Apple's newest AI-capable iPhones are Arm-based chips, for example, is manufactured by Taiwan Semiconductor Manufacturing.
It's not just about preserving smartphones' battery life. Arm's processing architecture can offer power efficiency to automobiles, laptops, and yes, even data centers, where its processors are using up to 60% less electricity than comparable conventional processing chips. Its share of this market is still in the single digits. But with its chips' efficiency now being touted by partner Amazon Web Services, Arm's goal of controlling 50% of the global data center market by the end of this year doesn't exactly seem far-fetched. These won't all necessarily be artificial intelligence data centers. But certainly some of them will be.
Arm stock may look and feel overpriced and overvalued here. And perhaps it is. Yet with shares still trading where they were a year ago, at least for the time being the window of opportunity is open to interested investors.
Navitas Semiconductor
Navitas Semiconductor's (NVTS -1.56%) growth strategy is simple enough -- take an older technology and make it better, and better suited for more modern applications.
In this case the technology in question is the silicon found in all modern computerized electronics, as well as many simple motorized tools and heavy machinery...anything that requires electricity to function, including power grids, solar power equipment, and data center power supplies. Navitas Semiconductor's silicon carbide replaces ordinary silicon with something that's not only more durable, but can more cost-effectively handle the higher power loads that equipment like electric vehicles, the aforementioned solar power systems, and data centers require or produce.
The company's gallium nitride power integrated circuitry, on the other hand, allows for the compact combination of multiple microcircuits that might normally require more than one discrete component being embedded into a single circuit board, reducing its energy consumption. That's why this tech is well suited for smaller electronics like smartphone chargers or televisions, or even smartphones now that they're starting to handle generative AI duties from the devices themselves.
Image source: Getty Images.
It's not the easiest stock to own, for the record. These are relatively new technologies, and while they're drawing interest (including from AI titan Nvidia), they aren't producing consistent growth...at least not yet. Navitas is also still unprofitable, adding to the stock's volatility.
The company's making forward progress toward profitability, though, as the need for its solutions becomes increasingly inevitable. Following this year's likely sizable revenue setback compared to an unusual revenue surge in the same quarter of 2024, analysts are looking for top-line growth of 51% next year and another 39% improvement the year after that. The market should continue rewarding the promise of this progress, even if only erratically.
SoundHound AI
Finally, add SoundHound AI (SOUN -2.09%) to your list of brilliant AI stocks to consider before July comes to a close.
In its infancy, computerized voice-recognition wasn't great. It could distinguish spoken words and sounds from a narrow range of established options, allowing it to handle basic self-service phone calls. But that was about it.
SoundHound AI helped usher in the next generation of voice-based artificial intelligence technology. By melding this voice recognition with deeper machine-learning that allows for a contextual and even predictive understanding of spoken words, this company's solutions are suited for work like fast-food order-taking, conversational customer service, onboard assistance in automobiles, and consumer electronics that don't just take commands, but understand requests that may be unusually voiced.
There's been no shortage of drama here, nor volatility for the stock. For instance, earlier this month Piper Sandler's James Fish affirmed his long-term optimism on SoundHound's tech, but questioned whether or not the company would be able to easily navigate the near-term transition to a subscription-based revenue model as well as yet another acquisition integration. The corresponding downgrade comes just two months after Piper Sandler initiated coverage of the company's stock at an overweight rating, serving as a microcosm of the pushing and pulling that SoundHound and SoundHound shares have experienced since it became publicly traded back in 2022.
The fact is, however, SoundHound AI's future has never been more promising than it is right now. Several product/platform developments are finally getting traction, boosted by multiple acquisitions that the market didn't always cheer. Next year's projected revenue growth of 27% is a hint of what should be the long-term norm here now that it's got all the technological prices of its puzzle put together.
In this vein, an outlook from industry research outfit Market.us suggests that the global voice-based AI customer service agent business is poised to grow at an average annual rate of 35% through 2033, while the bigger conversational AI market will grow at a solid pace of 24% per year through 2035. SoundHound's positioned to capture at least its fair share of this growth...something the stock's recent bullishness suggests investors are finally catching on to.
