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Confluent Inc Cl A(CFLT-Q)

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2 Artificial Intelligence (AI) Stocks That Could Go Parabolic

Motley Fool - Fri Nov 24, 2023

Technology stocks have been on fire in 2023, which is evident from the 51% surge in the Nasdaq-100 Technology Sector index, and one of the primary reasons behind this impressive rally is the growing adoption of artificial intelligence (AI) across multiple industries.

However, not all companies that could benefit from AI adoption have performed well on the stock market this year. Confluent(NASDAQ: CFLT) and SoundHound AI(NASDAQ: SOUN) are two such names that have underperformed the Nasdaq-100 Technology Sector index. While shares of SoundHound AI are up 23% in 2023, Confluent stock has dropped 14%.

But investors may want to take advantage of the current underperformance of these tech stocks and buy up a few shares before they go parabolic, driven by companies' healthy levels of growth and the impact of AI adoption on their businesses. A parabolic move refers to the rapid rise in the stock price of a company in a short period, similar to the right side of a parabolic curve on a chart.

Let's look at the reasons why Confluent and SoundHound AI could go parabolic, thanks to AI.

1. Confluent

Confluent stock had a nightmarish start to November as the stock plunged over 40% in a single session after the data-streaming platform released its third-quarter results on Nov. 1. The reason behind the shares crashing was management's weak guidance, as the company now expects Q4 revenue to increase only 21% year over year at the midpoint, instead of the 26% growth that analysts were anticipating.

What should motivate savvy investors now is a chance to buy Confluent stock at just 7.6 times sales, which is lower than the stock's price-to-sales ratio of 11.4 at the beginning of this year, despite quarterly sales growing nearly 20% over the last three quarters. In other words, buying Confluent at its relatively cheaper valuation looks like a no-brainer as business is growing at a healthy pace, and AI is capable of supercharging its growth.

Getting into the weeds, Confluent provides a data-streaming platform in the cloud which allows customers to store, access, and manage data in real time instead of storing it in silos. As a result, Confluent customers are able to connect their data and make real-time decisions. The company claims that it is sitting on a massive addressable market worth $60 billion, and AI can give the company an opportunity to tap a bigger chunk of this market.

That's because Confluent's platform also allows customers to build data-intensive apps in real time, allowing them to train AI models continuously and deploy them for multiple uses, such as for detecting frauds, delivering personalized recommendations, and also to power generative AI-enabled travel assistants.

Management points out that customers can use Confluent's tools to "tap into their existing data stores, modern or legacy, and curate them for consumption by AI tools to drive actionable intelligence". With demand for large language models (LLMs), which are critical for developing AI tools such as chatbots, expected to increase at an annual pace of 35% over the next five years, demand for Confluent's offerings is also likely to increase.

Confluent has built a solid base of 4,900 customers, which means it already has a substantial market for cross-selling its services, potentially generating more revenue organically. It's worth noting that the number of Confluent customers with more than $1 million in annual recurring revenue (ARR) increased an impressive 38% year over year last quarter. Customers with more than $100,000 in ARR were up 25%.

The company is on track to finish 2023 with $768.5 million in revenue at the midpoint of its guidance range. That would be a 31% increase over the prior year. Also, Confluent reported remaining performance obligations (RPO) worth $824 million last quarter, which refers to the amount of contracted future revenue that the company expects to recognize.

So, Confluent has a solid revenue pipeline that should allow it to maintain healthy levels of growth over the next year, and this could supercharge the company's stock. Wall Street has a median price target of $24 on Confluent, which points toward a 24% jump from current levels. However, the Street-high price target of $37 suggests that Confluent could surge 90%, which could be the case if the stock makes a parabolic move thanks to AI.

2. SoundHound AI

SoundHound AI is another stock that analysts expect to go parabolic over the next year. Its median price target of $5 suggests that SoundHound could jump 125% from current levels, and it won't be surprising to see the stock delivering such terrific upside considering the pace at which it is growing.

SoundHound AI's revenue was up 19% year over year in 2023's Q3 to $13.3 million. The company anticipates Q4 revenue to grow at a faster pace to $18 million at the midpoint of its guidance, which would be a 90% increase over the year-ago period. This shows that the adoption of SoundHound AI's voice AI platform is increasing.

SoundHound's offering allows customers to develop and deploy AI-enabled voice assistants, automatic speech recognition, and text-to-speech programs, among others. These are fast-growing markets that should help SoundHound sustain its impressive growth for a long time.

For example, the speech- and voice-recognition market is estimated to be worth $56 billion by the end of the decade, growing at an annual pace of 19%. Meanwhile, Precedence Research estimates that the conversational AI market could generate annual revenue of $84 billion in 2032 as compared to $10 billion last year.

The good part is that SoundHound has started taking advantage of this opportunity as its platform is being adopted by customers across multiple industries, ranging from restaurants to automakers to retail stores. All this explains why the company has a solid cumulative-bookings backlog of almost $342 million, which points toward a solid revenue performance.

SOUN Revenue Estimates for Current Fiscal Year Chart
SOUN Revenue Estimates for Current Fiscal Year data by YCharts.

In all, SoundHound's healthy growth is here to stay. It is worth noting that the stock is currently trading at 12.6 times sales, which is slightly lower than the sales multiple of 13 at the end of 2022. So, it isn't too late for investors to buy this AI stock, and they may want to do so before it goes on a parabolic run and becomes more expensive.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Confluent. The Motley Fool has a disclosure policy.

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