Since artificial intelligence (AI) emerged as a game-changer in early 2023, the overall U.S. stock market has experienced an impressive rally. S&P500 It has soared more than 50% in the past two years. But some AI stocks are making that rally look like child’s play.
Since the beginning of 2023, the social media giant meta platform(NASDAQ:Meta) has soared more than 400%, an impressive gain for such a large company. Soundhound AI(NASDAQ: SOUN)an audio AI technology startup, is leading the way with nearly 700% return. Surprisingly, software companies Palantir Technologies(NASDAQ:PLTR) outperformed them all, by over 900% in just 24 months.
Such a meteoric growth trajectory is not typical of the stock market. So do they have exceptional fundamentals to justify the return? Or, more importantly, can they continue? The answers vary.
Much of what we’ve seen so far about AI has been about text-based prompts, but conversational AI, or the ability to talk to it (and have it respond), is fundamental to how AI will impact our daily lives. SoundHound AI specializes in audio and conversation-based AI technology. This becomes more complex because in addition to the intelligence needed to think and generate a response, it also requires the intelligence to understand and translate voice prompts into machine data.
SoundHound AI started in the automotive industry. You may be used to speaking commands to your vehicle while driving. The company then expanded into the restaurant industry, leveraging conversational AI for drive-thru and ordering. However, the potential for expansion is huge and includes almost any application that uses human agents. Think about call centers, retail, and customer service in different industries.
The company’s third-quarter revenue increased 89% year over year, and management raised its fourth-quarter outlook. Unfortunately, that growth has been small. Revenue for the third quarter was just $25.2 million. On the other hand, stocks have corporate value Sales are $5.1 billion, compared to a 2025 revenue forecast of $164 million. This equates to a ratio of 31, making SoundHound very expensive right now. It may be difficult for the stock price to continue at its current pace, so prospective shareholders should look for a pullback before buying.
There is a huge opportunity ahead for Palantir Technologies, as AI software will impact nearly every industry in the future. The company’s AIP platform for developing and deploying AI applications includes: lit a fire under the business. Although revenue growth has accelerated in recent quarters, the company still only has 629 commercial customers. With hundreds of thousands of large companies (potential customers) around the world, Palantir’s long-term ceiling is very high.
Unlike many speculative AI stocks, Palantir has already generated strong returns. The company converts 37% of its revenue into free cash flow, adds $4.5 billion to its balance sheet, and has zero debt. Additionally, the business is profitable under generally accepted accounting principles (GAAP). Palantir’s rise should surprise no one. The company is a profitable and fast-growing AI innovator.
Palantir’s only problem is that its stock is too far ahead of its business. The stock price has grown over 900%, but the company has not. Palantir currently trades at a PEG ratio of 5. This is a great business, but I don’t like paying more than a PEG ratio of 2 to 2.5, even for the best stocks. Investors probably shouldn’t expect stocks to continue rising as much as they have until valuations settle down a bit.
Social media giant Meta Platforms is the largest company on this list (so far), with a market capitalization of $1.5 trillion. Still, the company has the financials to back it up. Meta generates more than $156 billion in annual revenue and more than $50 billion in cash flow. The company’s main business is digital advertising, which generates revenue from billions of people who use Facebook, Instagram, WhatsApp, and Threads.
Meta is deeply involved in AI technology, including large-scale data center investments, open source AI models (Llama), and an entire business unit dedicated to AI and Metaverse products and services (Reality Labs). Meta is already developing AI tools that help advertisers get more return on their ad spend, increasing Meta’s pricing power and driving growth in its core business.
The stock’s PEG ratio is currently just 1.3, so Meta’s valuation could grow further before becoming a cause for concern. Meanwhile, analysts expect Meta’s profits to grow 18% annually over the long term. Investors may not be able to achieve another 400% over the next two years, but 40% to 50% seems possible. If this happens, the meta could continue to outperform the market for some time.
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Randi Zuckerberg is a former Facebook head of market development and spokesperson, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has a position in and recommends Meta Platforms and Palantir Technologies. The Motley Fool has Disclosure policy.
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