Two AI Stocks to Consider for Your Portfolio

The world of artificial intelligence (AI) is rapidly evolving, and investing in AI stocks can offer substantial growth opportunities. Currently, the AI market is valued at about $184 billion, but it's projected to skyrocket to around $827 billion by the end of the decade, reflecting an average annual growth rate of nearly 30%.

Invest in Established Leaders in AI

If you're considering investing in AI, one strong candidate to look at is Nvidia (NVDA 2.31%).

There's a saying: during a gold rush, sell shovels. This concept holds true for Nvidia and the AI landscape today. The development and functioning of AI models require substantial computing power, which often depends on advanced graphics processing units (GPUs).

Nvidia has positioned itself as a leader in producing AI accelerator GPUs, capturing an impressive market share estimated between 70% to 95% in the AI chip domain. The company's pricing power is also notable, with gross margins hovering around 76%, significantly better than competitors, who report margins of about 40% to 50%.

The growth in AI spending isn't expected to be a fleeting trend; instead, investments in AI infrastructure are projected to quadruple through the end of the decade, with a compound annual growth rate (CAGR) close to 30%. Although competition is on the rise, Nvidia's existing market strength enables it to continue investing in innovative products and maintaining an edge over rivals.

While some investors might consider Intel and Advanced Micro Devices as alternative hardware options within the AI sector, Nvidia stands out as the prime choice for those wishing to directly invest in AI advancements.

Explore Smaller, Emerging AI Stocks

Nvidia is an appealing stock option, but its current $3.3 trillion valuation raises questions about whether it can sustain similar stock performance moving forward. While Nvidia's sales are likely to climb over the next decade, its market price reflects a high valuation at approximately 35 times sales.

If you're aiming for potentially higher gains in the AI sector, consider smaller stocks like SoundHound AI (SOUN -5.64%). This company is valued at around $1.9 billion and is well-positioned to benefit from multiple AI growth drivers, albeit with more risk compared to Nvidia.

As implied by its name, SoundHound focuses on voice recognition and sound technologies in AI. Its services can enhance user experiences in various situations, whether it's assisting with music playback on your phone, providing support in vehicles, or streamlining communications in customer service.

Although SoundHound's technology has been around for years and has attracted a diverse clientele, including major automakers and well-known restaurant chains, it faces tough competition from larger tech companies that are developing their own voice AI platforms.

While the long-term success of SoundHound remains uncertain, the company is still operating at a loss and its R&D budget of $56 million per year pales in comparison to the expenditures of bigger firms. However, it presents an investment opportunity in a market segment poised for growth, all while being valued under $2 billion. The risks are present, but if the company can maintain its current momentum, substantial growth may be possible.

The views expressed in this article do not reflect the author’s position in any of the mentioned stocks. Investment decisions should be made based on individual circumstances and thorough research.

AI, Stocks, Investing