The earnings season drama continued Thursday as investors digested the latest financial reports and what they mean in terms of the ongoing economic recovery.
Investors are sitting on the edge of their seats, waiting to hear whether the accelerated adoption of artificial intelligence (AI), which began in earnest last year, will help propel technology stocks to new heights. Strong results and blockbuster guidance from a deeply integrated AI company helped push other stocks in the sector higher.
In this context, specialist in AI servers Super microcomputer (NASDAQ:SMCI) grew 1.6%, AI solutions provider C3.ai (NYSE:IA) climbed 3.4%, chip maker Semiconductor manufacturing in Taiwan (NYSE:TSM) jumped 6.8%, specialist in warehouse automation Symbolic (NASDAQ:SYM) climbed 9.2% and audio solutions provider IA AI SoundHound (NASDAQ:SON) jumped 14.6% at market close on Thursday.
A check of all the usual suspects — regulatory filings, financial reports and analyst price target changes — revealed nothing that might company specific news that sends one of these AI stocks higher. This suggests that most investors were captivated by how AI affected the company's quarterly financial results. Arm holds (NASDAQ:ARM).
A surprisingly solid performance
The semiconductor specialist reported results for its fiscal third quarter 2024 (ended December 31), and investors were watching closely to see if the company would benefit from the rush to adopt AI – and they were not disappointed. And while Arm's results were better than expected, it was the company's blockbuster predictions that surprised market watchers.
Arm generated $824 million in revenue, a 14% year-over-year increase. While that may not seem spectacular at first glance, it exceeded the company's previous guidance of between $720 million and $800 million. Its profits also increased, with adjusted earnings per share (EPS) of $0.29, up 32% year-over-year.
For perspective, analyst consensus estimates called for revenue of $761 million and EPS of $0.25, so Arm easily beat both benchmarks.
However, it was Arm's guidance for the current quarter that caught investors off guard. Management said it expects fourth-quarter revenue in the range of $850 million to $900 million, well above Wall Street expectations of $778 million. The company also forecasts a commensurate increase in profitability, targeting adjusted EPS of $0.30 at the midpoint of its guidance, beating analyst estimates of $0.21.
Comments from CEO René Haas further fueled the fervor. In an interview with Bloomberg Television, the CEO said: “AI is in no way shaping a hype cycle,” he said. “We believe AI is the most important opportunity of our lifetime, and we are only at the beginning.”
Following these strong results and the CEO's bold statement, Arm Holdings shares soared nearly 48%.
AI will affect all sectors
It's easy to understand why investors got caught up in this frenzy, as Arm's strong results and stellar forecasts grabbed headlines. Additionally, it's only been a year since generative AI first emerged, and many companies are still deciding how best to implement this technology. This suggests that the AI boom could continue for some time.
So what does all this have to do with our quintet of stocks, and how will they benefit from these advances in AI?
Super Micro Computer manufactures energy-efficient and highly customizable high-end servers, helping to meet the growing demand for AI.
C3.ai provides turnkey AI solutions that help businesses quickly operationalize their AI applications.
Taiwan Semiconductor Manufacturing operates a foundry that produces many chips used in AI applications.
Symbotic has developed an AI-powered end-to-end warehouse automation system that optimizes storage and traffic. As retailers look to benefit from AI, Symbotic will likely be at the top of their list.
SoundHound AI provides AI-controlled voice and audio solutions to the automotive and foodservice industries. The company's solutions can be adapted for restaurant drive-thrus, self-service kiosks and telephone ordering, among others, which will help these businesses join the AI revolution.
It's important to remember that not all AI-centric companies are equal. It will be important, over time, that these companies deliver on the promise of AI by generating the revenues and profits expected by investors. Among these five companies, only Taiwan Semiconductor and Super Micro Computer are currently profitable.
Then there is the question of valuation. SoundHound AI and C3.ai each sell for 11 times sales, while Taiwan Semiconductor, Super Micro Computer, and Symbotic sell for 10 times, 4 times, and 2 times sales, respectively.
For my money, Taiwan Semiconductor is the least risky of the stocks featured here, and Symbotic is the best value. That said, each of these stocks represents an attractive opportunity, but investors should size their positions based on their risk tolerance and the amount of volatility they are willing to withstand.
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Danny Vena has no position in any of the stocks mentioned. The Motley Fool posts and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends C3.ai and Super Micro Computer. The Motley Fool has a disclosure policy.
Why shares of Super Micro Computer, C3.ai, Taiwan Semiconductor and other artificial intelligence (AI) stocks rallied on Thursday was originally published by The Motley Fool