The broader U.S. stock market has enjoyed a remarkable run since artificial intelligence (AI) emerged as a game changer in early 2023. The S&P 500 has rocketed over 50% higher over the past two years. Yet some AI stocks have made those gains look like child’s play.
Since the beginning of 2023, social media giant Meta Platforms(NASDAQ: META) has soared over 400%, a jaw-dropping return for such a large company. SoundHound AI(NASDAQ: SOUN), an emerging player in audio AI technology, has topped it with nearly 700% returns. Amazingly, software company Palantir Technologies(NASDAQ: PLTR) has topped them all, galloping over 900% in just 24 months.
These meteoric growth trajectories aren’t typical of the stock market. So, do they have the extraordinary fundamentals to justify their returns? Or, more importantly, can they continue? The answer is a mixed bag.
Much of what you’ve seen about AI has involved text-based prompts, but conversational AI, the ability to speak to it (and have it speak back), is fundamental to how AI can impact daily life. SoundHound AI specializes in audio and conversation-based AI technology. That’s more complex because it involves the intelligence to think and generate responses, plus the intelligence to understand and translate an audio prompt into machine data.
SoundHound AI started in the automotive industry. You may be familiar with speaking commands to your vehicle while driving. The company has since expanded to the restaurant industry, powering conversational AI for drive-thrus and ordering. However, the expansion potential is enormous, including almost any application with human agents. Think about call centers, retail, and customer service across many industries.
The company’s revenue grew 89% year over year in the third quarter, and management raised guidance for the fourth quarter. Unfortunately, that growth is on a small scale; Q3 revenue was only $25.2 million. Meanwhile, the stock has an enterprise value of $5.1 billion, against 2025 revenue estimates of $164 million. That’s a ratio of 31, making SoundHound very expensive today. It could be difficult for the stock to continue at its current pace, so prospective shareholders should look for a pullback before buying.
AI software will impact almost every industry in the future, so there’s a big opportunity ahead of Palantir Technologies. The company’s AIP platform for developing and deploying AI applications has lit a fire under the business. Revenue growth has accelerated for several quarters, and the company still only has 629 commercial customers. There are hundreds of thousands of large enterprises worldwide (potential customers), so Palantir’s long-term ceiling is excitingly high.
Unlike many speculative AI stocks, Palantir is already highly profitable. The company converts 37% of its revenue into free cash flow, adding to a balance sheet with $4.5 billion and zero debt. Plus, the business is comfortably profitable under generally accepted accounting principles (GAAP). Palantir’s rise shouldn’t surprise anyone; it’s a highly profitable, fast-growing AI innovator.
Palantir’s only problem is that its shares have gotten too far ahead of the business. The stock price has grown over 900%, but the company hasn’t. Today, Palantir trades at a PEG ratio of 5. It’s an excellent business, but I don’t like paying beyond PEG ratios of 2 to 2.5 for even the best stocks. Investors probably shouldn’t expect the stock to keep rising like it has until the valuation cools off a bit.
Social media giant Meta Platforms is the largest company on this list (by far), with a $1.5 trillion market capitalization. Still, the company has the financials to back it up. Meta generates over $156 billion in annual revenue and over $50 billion in cash flow. Its primary business is digital advertising, monetizing the billions of people who use Facebook, Instagram, WhatsApp, and Threads.
Meta is deeply involved in AI technology, including massive data center investments, an open-source AI model (Llama), and an entire business unit devoted to AI and metaverse products and services (Reality Labs). Meta has already developed AI tools to help advertisers get more from their ad spend, increasing Meta’s pricing power and driving growth in the core business.
The stock’s PEG ratio is only 1.3 today, so Meta’s valuation could expand further before becoming a concern. Meanwhile, analysts estimate that Meta will grow earnings by 18% annually over the long term. Investors may not see another 400% run over the next two years, but 40% to 50% seems possible. That could keep Meta on its market-beating trajectory for a while longer.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is 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 positions in and recommends Meta Platforms and Palantir Technologies. The Motley Fool has a disclosure policy.
