"Difficult to say," Yoda said. "Always in motion is the future."
That's particularly true in the stock market, where game-changing events can arrive without warning and the unpredictable price moves inspired classics like Burton Malkiel's "A Random Walk Down Wall Street."
That being said, historical patterns suggest that certain outcomes are more likely than not. As a group, stock prices tend to rise in the long run. Thanks to population growth, technological advancements, and increases in productivity, humanity generates more economic value over time, even when adjusted for inflation.
And some segments of the stock market usually perform better than the broader market average. For example, following the market data back to 1984, you'll see that the Nasdaq Composite (NASDAQINDEX: ^IXIC) index has gained an average of 11.1% per year. The S&P 500(SNPINDEX: ^GSPC) rose at an average pace of 9% over the same period:
The current artificial intelligence (AI) boom should keep the Nasdaq's fires burning for quite a while. Looking at the tech-heavy market index's history of annual index results, the Nasdaq Composite typically does quite well in the second year after the end of a period of negative returns. The average Nasdaq return in these post-panic years works out to 21,7% with outliers ranging from 7.4% to 43.6%.
That's where Wall Street stands today, two years after the inflation crash of 2022. Historical market trends suggest another strong year for Nasdaq stocks, and the soaring interest in AI stocks should provide plenty of fuel for those fires. Even Yoda might concede that 2024 should be a good year for tech stocks.
On that note, you should take a closer look at Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL) and SoundHound AI(NASDAQ: SOUN) right about now. These AI experts are poised to perform in 2024 and beyond, but for very different reasons.
The affordable giant: Alphabet
Google parent Alphabet has firmly positioned itself as a leader in the AI market. Equipped with one of the largest cloud computing platforms on the market, decades of pioneering AI development, and the powerful Google Gemini large language model (LLM), the company has aligned its extensive resources to make the most of the AI boom.
To follow Alphabet's AI business, you should track the sales and operating profits of the Google Cloud segment. There, first-quarter sales rose 28% year over year while operating income multiplied from $191 million to $900 million. And the division has a gargantuan backlog on long-term contracts, which will generate subscription-style revenues for years to come. In the first quarter, that order book stood at $72.5 billion, "primarily related to Google Cloud."
Gemini is arguably the most capable rival to OpenAI's ChatGPT chatbot. Its advanced LLM engine was created by the combined teams of Google Brain and Google DeepMind -- two of the world's leading AI research teams before they were combined. So far, the best version of this tool is only available in English, for a monthly fee of $20. Over time, I expect Gemini's artificial brains to show up in a plethora of Google's freely available tools, from Google Maps to Google Docs -- and services that aren't even public knowledge yet.
And it's hard to find an AI giant with a more affordable stock than Alphabet. Shares are changing hands at 25 times trailing earnings and 30 times free cash flows. Microsoft(NASDAQ: MSFT) comes with a 40% price premium on both counts, largely thanks to its close association with OpenAI and ChatGPT. Both software giants run far behind AI chip designer Nvidia(NASDAQ: NVDA), whose stock trades at 73 times earnings and 80 times free cash flows.
So if you want to tap into the AI market through an established leader in software and services, but without paying an arm and a leg for that privilege, Alphabet is your best bet today.
Image source: Getty Images.
The exciting growth story: SoundHound AI
There's nothing affordable about SoundHound AI's stock. A modest investment from Nvidia sent SoundHound AI stock skyrocketing in February and March. These shares trade at 29 times sales, not earnings, and the AI-powered audio analytics expert isn't even turning a profit yet.
So this stock isn't for the faint of heart. Then again, tomorrow's biggest winners never look cheap in their early hypergrowth stage.
But the company is staring down a potentially massive target market. You can already find SoundHound AI's voice controls in consumer electronics, drive-through ordering windows, phone-based voice menus, and the infotainment systems in several car brands. In the long run, the company should find even more target markets, expanding an addressable global opportunity already worth trillions of dollars per year.
I'm not saying that SoundHound AI will collect trillions in annual sales, but even a very small slice of this mammoth market can nourish several large-cap winners in the audio analytics and voice control space.
Furthermore, the concept of voice-driven system controls may sound simple, but SoundHound AI's sophisticated technology stands alone in many ways. Even tech titans like Google and Microsoft can't match this company's top-quality speech interpretation.
With just $45.9 million of full-year revenues in 2023, SoundHound AI is poised for tremendous growth. And just like Google Cloud, the company has a large and rapidly growing backlog of long-term subscription and contract orders. That backlog doubled year over year to $661 million in the fourth quarter of 2023.
Those revenue conversions are coming, and SoundHound AI's stock should follow suit with significant long-term gains. Today's $1.3 billion market cap should look quaintly petite a few years down the road. This little AI expert is going places.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Alphabet, Nvidia, and SoundHound AI. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
