Shares of SoundHound AI (NASDAQ: SOUN) bounded higher this morning, soaring as much as 10.3%. As of 11:56 a.m. ET, the stock was still up 7%.

The catalyst that drove the artificial intelligence (AI) specialist higher was the revelation that an existing customer was expanding its relationship after experiencing a dramatic productivity increase.

The Amelia AI acquisition is paying off

Late last year, SoundHound AI acquired enterprise AI software company Amelia to expand its reach in conversational AI. At the time, the pair cited “a distinct competitive advantage in the burgeoning conversational AI space.”

That acquisition is paying off. In a press release that dropped on Wednesday morning, SoundHound announced that insurer Apivia Courtage, a division of privately held AEMA Group, would adopt the Amelia 7 AI agent platform for its contact centers as part of the company’s digital transformation. 

Citing the duo’s existing “successful relationship,” which began in 2023, Apivia noted that SoundHound’s Amelia platform had already driven a 20% productivity increase at its contact centers. The company also pointed out that SoundHound’s AI Agents had “handled thousands of calls” related to medical expense reimbursement and insurance, allowing human agents to focus on higher-level tasks.

This represents a huge vote of confidence for SoundHound’s Agent AI system, which could ultimately attract other enterprise users. Investors no doubt viewed this as a positive development. After losing more than 60% of its value to kick off the year, SoundHound has come roaring back, gaining 157% since its bottom in mid-April, though it’s still underwater year to date.

The rebound was partially driven by the company’s blistering financial results. In the second quarter, SoundHound delivered record revenue of US$42.7 million, up 217% year over year. That said, investors shouldn’t overlook the fact that its loss per share of US$0.19 worsened compared to an US$0.11 loss in the prior-year quarter.

There’s also SoundHound’s valuation to consider, as the stock is selling for 37 times next year’s expected sales. That, combined with the company’s continuing losses, shows that SoundHound AI stock isn’t without risk.

The post Why SoundHound AI Stock Soared Wednesday Morning appeared first on The Motley Fool Canada.

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Fool contributor Danny Vena has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

One of the most intriguing players to emerge in the era of artificial intelligence (AI) is Palantir Technologies (NASDAQ: PLTR). The company had already made a name for itself in the defense and intelligence spaces and has been working diligently to prove its mettle for enterprise-level businesses. Those aspirations have come into focus over the past couple of years, as Palantir has gained more than 900%. The commensurate increase in its valuation has raised the alarm and been the subject of much debate in Wall Street circles.

Palantir reported results after the market closed on Monday, and to say it crushed expectations might be an understatement. Not only did the company easily surpass estimates, but management’s guidance suggests its growth will continue to accelerate.

Let’s take a look at what drove Palantir’s robust results and what the future might hold.

The poster child for AI

For the fourth quarter, Palantir generated revenue of US$828 million, up 36% year over year and 14% quarter over quarter. This resulted in adjusted earnings per share (EPS) of US$0.14, which climbed 75%. To put the results in the context of expectations, analysts’ consensus estimates were calling for revenue of US$782 million and EPS of $0.11, so Palantir easily cleared Wall Street’s already high bar.

The results were fueled by U.S. commercial revenue that jumped 64% year over year and 20% sequentially — well ahead of management’s guidance for growth of at least 50%. The U.S. government segment also answered the call, with revenue climbing 45%.

Customer metrics underpinned the company’s robust results. Palantir’s customer count grew 43% year over year, driven by a 73% increase in U.S. commercial customers. The underlying deals that fueled the results were also eye-opening, as Palantir inked 129 deals worth at least US$1 million. Of those, 58 were worth at least US$5 million, and 32 were worth at least US$10 million.

It’s worth noting that many of these contracts are also helping to lay the foundation for future profits. The company’s remaining performance obligation (RPO) — or sales not yet booked as revenue — climbed 40% year over year to US$1.73 billion. When RPO is outpacing current revenue growth, it provides insight into future potential, suggesting its growth spurt has further to run.

The spark that ignited Palantir’s blockbuster growth is the company’s Artificial Intelligence Platform (AIP), which is revolutionizing the way businesses profit from AI. The company employed a novel approach, hosting boot camps that marry users with Palantir engineers to help them apply AI to mission-critical operations, “going from zero to use case in five days or less.” That strategy has been wildly successful.

What the future could hold

Palantir provided full-year revenue guidance for 2025 of US$3.75 billion, which would represent year-over-year growth of 31% at the midpoint of its guidance. The biggest contributor to its rosy outlook is the U.S. commercial segment — which includes AIP — as management is now forecasting growth of 54%, up from management’s forecast for 50% growth just last quarter.

In Palantir’s letter to shareholders, CEO Alex Karp said of AI, “We are still in the earliest stages, the beginning of the first act, of a revolution that will play out over years and decades.”

The data clearly shows that Palantir is firing on all cylinders. However, some investors are concerned that the stock has gotten away from itself and Wall Street has joined the chorus. Of the 22 analysts that offered an opinion in February, only three rate it a buy or strong buy, 13 rate it a hold, and the remaining six rate hold underperform or sell ratings. Palantir’s biggest doubters are nearly universal in citing the stock’s valuation as the reason for their bearish calls.

A quick look at the numbers helps illustrate why. The stock is currently selling for 412 times earnings and 75 times sales (as of this writing) — which is astounding by any stretch of the imagination. However, the most widely used valuation metrics tend to fall short when assessing high-growth stocks. Applying the more appropriate forward price/earnings-to-growth (PEG) ratio — which considers Palantir’s accelerating growth — clocks in at 0.38, when any number less than 1 suggests an undervalued stock.

That said, given its lofty valuation, Palantir will continue to be volatile, and failure on the company’s part — real or perceived — to live up to investors’ elevated expectations could bring the stock crashing down. Recall that between early 2021 and late 2022, Palantir stock shed as much as 83% of its value.

The generative AI market is expected to be worth between US$2.6 trillion and US$4.4 trillion over the coming decade, according to global management consulting firm McKinsey & Company. If Palantir can successfully navigate the stormy seas of AI adoption and continue to carve out a profitable niche for itself, the stock price could be much higher a decade from now — but there will likely be numerous pitfalls along the way.

Given the company’s reliable execution, significant opportunity, and expanding profits, I believe Palantir Technologies is worth owning for the long term. However, given its frothy valuation, it may be safer to buy on weakness, or by dollar-cost averaging into the stock.

The post Palantir Investors Just Got Spectacular News from CEO Alex Karp appeared first on The Motley Fool Canada.

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Fool contributor Danny Vena has positions in Palantir Technologies. The Motley Fool recommends Palantir Technologies. The Motley Fool has a disclosure policy.

Investors were on the edge of their seats heading into Nvidia‘s (NASDAQ: NVDA) highly anticipated financial report after the market closed on Wednesday — and rightfully so. The company has become the bellwether for the tech industry and a barometer for the progress of the artificial intelligence (AI) revolution.

The chipmaker delivered better-than-expected results, giving investors assurances that this paradigm shift would continue. However, hidden among the otherwise blockbuster results was one red flag that bears watching.

Below, I’ll take a look at the results, what the future holds, and one thing investors should keep an eye on.

By the numbers

The bar was set high heading into Nvidia’s fiscal 2025 third quarter (ended Oct. 27), and the chipmaker delivered. The company generated record revenue of $35.1 billion, up 94% year over year and 17% sequentially. This fueled adjusted earnings per share (EPS) of $0.81, which surged 103%.

For context, analysts’ consensus estimates were calling for revenue of $33.13 billion and EPS of $0.75, so Nvidia cleared both hurdles with room to spare.

Fueling the robust results was a record performance from the data center business, which continues to be the main driver. The segment — which includes processors used for cloud computing, data centers, and AI — delivered revenue that soared 112% year over year to $30.8 billion, driven by strong demand for AI.

One of the concerns that surfaced last quarter was a sequential dip in the company’s gross margin, a trend that continued in Q3. Gross margin of 74.6% was down 500 basis points from 75.1% in the second quarter. CFO Colette Kress blamed a product “mix shift from H100 systems to more complex and higher cost systems.” While the trend continued this quarter, it’s still well above the average of the past decade.

Data by YCharts.

Yet even as revenue soared 94%, operating expenses climbed just 50%, sending more to the bottom line and fueling the 103% jump in EPS.

Nvidia’s cash stockpile has more than doubled over the past year, with cash and marketable securities of $38.5 billion, an increase of 110%. Free cash flow of $16.8 billion soared 138%.

The company provided investors with an update on the upcoming release of its highly anticipated Blackwell AI architecture, which is scheduled to begin shipping in the calendar fourth quarter:

We completed a successful mask change for Blackwell, our next Data Center architecture, that improved production yields. Blackwell production shipments are scheduled to begin in the fourth quarter of fiscal 2025 and will continue to ramp into fiscal 2026 … Both Hopper and Blackwell systems have certain supply constraints, and the demand for Blackwell is expected to exceed supply for several quarters in fiscal 2026.

Nvidia’s fiscal 2026 begins in late January, and the commentary suggests that even as demand remains strong, supply constraints will hamper its growth well into next year.

The future looks bright, but…

Management expects the company’s growth spurt to continue. Nvidia is guiding for record fourth-quarter revenue of $37.5 billion, which would represent year-over-year growth of 70%. While that’s ahead of Wall Street’s expectations of roughly $37 billion, investors were initially hesitant to celebrate — but that soon gave way to reverie.

Nvidia already has plenty of growth priced in, but the stock is still attractively priced, selling for roughly 35 times next year’s expected earnings. While that’s a slight premium, it’s a reasonable price to pay for a company that’s expected to grow earnings by 121% this year and 47% in its fiscal 2026.

There is one area investors should keep an eye on. In Nvidia’s CFO Commentary, Kress noted that “Cloud service providers represented approximately 50% of our Data Center revenue.” Doing the math reveals that 44% of Nvidia’s total revenue — or $15.4 billion — comes courtesy of the big cloud infrastructure providers, primarily Amazon Web Services, Microsoft‘s Azure Cloud, and Alphabet‘s Google Cloud.

The buildout of cloud data centers is ongoing, and the major cloud providers have all signaled they plan to continue spending heavily to expand their AI infrastructure. That trend primarily benefits Nvidia, as the company has a dominant 98% share of the market for data center graphics processing units (GPUs). However, that cuts both ways. If demand slumps — for any reason — the major cloud providers could rein in spending, putting billions of dollars of Nvidia’s revenue at risk.

Don’t get me wrong. I’m a big believer in the potential of AI and, by extension, the opportunity ahead for Nvidia. The stock represents roughly 12% of my personal portfolio (as of this writing), so I’m rooting for the company to succeed. That said, I’d be remiss if I didn’t keep a weather eye on the horizon for problems that could send the stock plunging.

The post Nvidia Just Delivered a Beat-and-Raise Quarter. There’s 1 Red Flag Investors Shouldn’t Ignore. appeared first on The Motley Fool Canada.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Fool contributor Danny Vena has positions in Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.

Shares of Nvidia (NASDAQ: NVDA) surged higher (again) on Tuesday, jumping as much as 4.9%. The stock gave up some of those gains in the afternoon but still closed up 4% for the day, settling at $147.01.

The catalyst that sent the chipmaker and artificial intelligence (AI) specialist higher was a pair of price target increases by Wall Street analysts ahead of the company’s quarterly report, which is expected to be released today after the market closes.

The bulls are running

Truist Securities analyst William Stein maintained a buy rating on Nvidia stock while increasing his price target to $167. For investors keeping score at home, that represents potential gains of 19% compared to Monday’s closing price.

The analyst believes Nvidia is a buy ahead of its earnings, as he thinks there’s still potential upside compared to Wall Street’s current expectations. He cites increasing demand in the data center market, which is the repository for the vast majority of AI systems and models.

Not to be outdone, Stifel analyst Ruben Roy maintained a buy rating on Nvidia stock while increasing his price target to $180. This represents potential upside of 28% compared to Monday’s closing price.

The analyst believes Nvidia will “beat and raise,” beating Wall Street’s consensus estimates for the quarter while also increasing its guidance for the full year. He points out that expectations have been rising ahead of Nvidia’s fiscal 2025 third-quarter results, which will be released after the market close on Wednesday. He cites supply chain checks as supporting robust demand for Nvidia’s soon-to-be-released Blackwell architecture.

A lot to prove

Nvidia dialed back expectations when the company issued its last quarterly report, but the results are expected to be robust nonetheless. For its fiscal 2025 third quarter (ended Sept. 29), the company guided for revenue of $32.5 billion, which would represent growth of 79%, with a corresponding uptick in profitability.

Investors will also be watching Nvidia’s gross margin, which was slightly lower in Q2 after hitting a new record in the first quarter. Another area of interest will be progress regarding the company’s upcoming Blackwell AI-centric processor release, which is expected to kick off later this year.

Nvidia stock is currently selling for 33 times next year’s earnings, but I’d argue that’s a small price to pay for a company that’s widely considered the gold standard for AI processing.

The post Why Nvidia Stock Rallied (Again) on Tuesday appeared first on The Motley Fool Canada.

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Fool contributor Danny Vena has positions in Nvidia. The Motley Fool recommends Nvidia. The Motley Fool has a disclosure policy.

Most market watchers would agree that one of the dominant forces driving the market rally over the past year is advancements in the field of artificial intelligence (AI). On the other hand, investors have kept a sharp eye on the trajectory of the economy as inflation continues to wane. Recent economic indicators suggest conditions are ripe for the Federal Reserve Bank to begin interest rate cuts, which could happen as soon as later this month.

Investors have also been keenly interested in the rate of AI adoption, looking for indicators that this trend still has legs, and recent results suggest these secular tailwinds continue to blow.

With that as a backdrop, semiconductor specialist Broadcom (NASDAQ: AVGO) soared 20.7% this week, AI chip specialist Nvidia (NASDAQ: NVDA) surged 17.1%, and database and AI cloud provider Oracle (NYSE: ORCL) climbed 13.9%, as of 2:57 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence.

It appears solid results from one member of the trio and rate-cut hopes helped spur a rally in the space.

A double dose of good news

Late last week, Broadcom reported the results of its fiscal 2024 third quarter (ended Aug. 4), and while the results were better than expected, the stock initially sold off on the news. However, as investors had time to digest the results, cooler heads prevailed, helping spark a rebound.

Broadcom generated revenue of $13.1 billion, up 47% year over year, while adjusted earnings per share of $1.24 increased 18%. The results were fueled by strong demand for the company’s Ethernet and custom accelerators used in AI-centric data centers. At the same time, however, Broadcom’s smartphone chip business — which was once its primary breadwinner — continues to struggle.

This weakness in Broadcom’s legacy business contributed to weak guidance for the upcoming fourth quarter, which helped fuel the initial sell-off. However, the company got good news earlier this week, as Apple unveiled its iPhone 16 lineup. Analysts at KeyBanc listed Broadcom as one of the principal beneficiaries, as the upgrade to Wi-fi 7 across those devices requires Broadcom hardware.

Furthermore, after a protracted battle with inflation, the central bank is expected to announce the first in a series of interest rate cuts when Fed officials conclude their two-day policy meeting, which concludes on Sept. 18. Most market watchers now believe a rate cut of 0.25% is now imminent.

It’s also worth noting Nvidia CEO Jensen Huang reassured investors this week about the state of AI adoption. During an interview at a technology conference, he noted the company was experiencing “incredible” demand for its AI processors. As the flag bearer for AI, this seems to suggest the trend has a long runway ahead.

Now what

What do interest rate cuts have to do with these three AI stocks? The prospect of reaping the productivity rewards from generative AI is certainly intriguing, but some businesses have been reluctant to pursue new business investments in the face of challenging economic conditions. The first interest rate cut will be an admission by the central bank that the economy has finally turned the corner. This could be the first in a series of rate reductions, which will likely spur additional adoption of AI. That, in turn, would benefit our trio of AI-focused companies.

• Broadcom creates many of the semiconductors and other tech used in data centers, where most AI resides.
• Nvidia is the leading provider of graphics processing units (GPUs) that provide the computational horsepower needed to power AI systems.
• Oracle provides the AI database and cloud infrastructure capabilities many will choose to join the AI revolution.

The adoption of AI has a long way to go. The market is expected to be worth between $2.6 trillion and $4.4 trillion annually, according to global management consulting firm McKinsey & Company. Even if they capture only a sliver of that opportunity, Nvidia, Broadcom, and Oracle will profit handsomely — as will their shareholders.

The post Why Nvidia, Broadcom, and Other Artificial Intelligence (AI) Stocks Rallied This Week appeared first on The Motley Fool Canada.

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Fool contributor Danny Vena has positions in Apple and Nvidia. The Motley Fool recommends Apple, Nvidia, and Oracle. The Motley Fool has a disclosure policy.

Investors looking to capitalize on the potential of artificial intelligence (AI) could do worse than investing in Palantir Technologies (NYSE: PLTR). The company has a long track record of developing AI solutions for the U.S. government and has become a rising star in the field of AI for business. Palantir’s move to develop data-centric solutions for enterprises was already gaining traction before the dawn of generative AI shifted the technology landscape.

Despite the recent market sell-off — which hit technology stocks particulary hard — Palantir’s upside potential has changed dramatically in recent quarters, driven by its novel approach to creating generative AI solutions for its customers. As a result, the company just delivered record results with the promise of more to come.

Here are five reasons to buy Palantir Technologies stock like there’s no tomorrow.

1. Palantir’s accelerating revenue growth

For the second quarter, Palantir generated record revenue of $678 million, up 27% year over year and 7% quarter over quarter. Analysts’ consensus estimates were calling for revenue of $652 million, so Palantir cleared that hurdle with ease.

However, it was the company’s U.S. commercial segment that turned heads, with revenue growing 55% year over year to $159 million, while the segment’s customer count surged 83% and now represents half of Palantir’s customer base. At the same time, its lumpy government revenue grew a respectable 24%.

Even more impressive was the U.S. commercial segment’s remaining deal value (RDV) — or the value of the contract’s not yet recognized as revenue — which grew 103% year over year and 11% sequentially. The growing backlog of business illustrates that demand for Palantir’s signature services continues to grow unfettered.

2. Palantir’s growing record of profitability

It isn’t just Palantir’s sales that are growing. The company has a growing track record of increasing its profitability. For the second quarter, Palantir delivered record profits of $134 million, marking its seventh consecutive quarter of GAAP profitability.

This resulted in record earnings per share (EPS) of $0.06, which soared 500% year over year. On an adjusted (non-GAAP) basis, EPS of $0.09 jumped 80%. Analysts’ consensus estimates were calling for adjusted EPS of $0.08, so the company cleared that bar as well.

3. Palantir’s Artificial Intelligence Platform (AIP) is driving growth

In response to the accelerating demand for generative AI, Palantir created its Artificial Intelligence Platform (AIP), which provides business leaders with solutions to everyday business conundrums. Many businesses are excited about the potential productivity gains promised by AI, but they simply don’t know where to begin to harvest those gains. Palantir’s novel solution is hosting “bootcamps,” or workshops where business leaders work side-by-side with Palantir engineers to address company-specific problems. And demand has been off the charts.

Since it began offering AIP Bootcamps in mid-2023, more than 1,025 organizations have participated, with many inking new contracts or increasing existing ones. Palantir cited multiple seven-figure deals that were signed within days of customers completing a boot camp.

4. Palantir’s beat came with a raise

The “beat and raise” is one measure investors use to judge the strength of a company’s results. As such, they look for the company to “beat” analysts’ expectations, which Palantir has clearly done, as laid out above. However, the second half of that formula is perhaps more important, as a company will “raise” its guidance in response to a strong performance — and Palantir did that as well.

Management increased its full-year revenue guidance to $2.75 billion at the midpoint of its guidance, or growth of 23% year over year, marking the second such increase in as many quarters.

Driving optimism was the strength of its U.S. commercial business. Palantir now expects full-year revenue for the segment of $672 million, or growth of at least 47%, up from its previous expectations of 45% growth.

5. An “unprecedented opportunity”

Digging into a company’s financial results provides the most concrete evidence of its success, but investors can also gain insight into its future potential by listening carefully to what management has to say about the results and its ongoing opportunities. CEO Alex Karp provided some compelling testimony about the road ahead in the company’s quarterly shareholder letter.

He noted that Palantir sees “an unprecedented opportunity” ahead, noting that in just over a year, AIP has “transformed our business.” Karp went on to point out the “persistent and unbridled demand” for AIP, calling it “an effective enterprise platform” that makes AI “useful to large institutions,” suggesting demand shows “no sign of relenting.”

While investors might be tempted to think his comments are hyperbole, the results seem to underpin his optimism.

A word on valuation

Bears will no doubt point out that Palantir’s valuation has gotten somewhat frothy, and rightfully so. As of market close on Monday, the stock was selling for 200 times earnings, which is clearly expensive. However, the price-to-earnings ratio may not be the most useful metric to use when measuring a high-growth stock. Using the more appropriate forward price/earnings-to-growth (PEG) ratio, which factors in the company’s impressive growth trajectory, Palantir boasts a multiple of 0.3, when any number less than 1 is the standard for an undervalued stock.

Given the company’s continued execution and the “unprecedented opportunity,” I’d argue that Palantir stock is a buy.

The post Market Selloff: 5 Reasons to Buy Palantir Technologies Stock Like There’s No Tomorrow appeared first on The Motley Fool Canada.

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Fool contributor Danny Vena has positions in Palantir Technologies. The Motley Fool recommends Palantir Technologies. The Motley Fool has a disclosure policy.

Shares of Palantir Technologies (NYSE: PLTR) charged out of the gate on Tuesday, spiking as much as 13.8%. The stock closed at $26.59, up 10.3% for the day.

The catalyst that sent the artificial intelligence (AI) software and data mining specialist higher was the company’s quarterly financial report and management’s bullish commentary that suggested there was more to come.

You can’t spell “gains” without “AI”

For the second quarter, Palantir generated revenue that accelerated to 27% year over year (and 7% sequentially) to $678 million.

This resulted in record net income, marking the company’s seventh successive quarter of profitability according to generally accepted accounting principles (GAAP). Earnings per share (EPS) of $0.06 soared 500% year over year, while adjusted EPS of $0.09 rose 80%.

To give the results context, analysts’ consensus estimates were calling for revenue of $652 million and adjusted EPS of $0.08, so Palantir cleared both bars.

The results were driven by robust U.S. commercial revenue, which surged 55% to $159 million, as customers flocked to the company’s Artificial Intelligence Platform (AIP) and generative AI. The segment’s customer count grew 83% year over year, while its remaining deal value — or sales that have not yet been recognized as revenue — soared 103%. Not only was new customer acquisition strong, but existing customers were spending more, as evidenced by a net dollar retention rate of 114%.

Classic beat and raise

Investor sentiment was also boosted by bullish commentary courtesy of chief revenue officer Ryan Taylor. He noted that the company’s boot camps were wildly successful, saying they remained a “key go-to-market” strategy. He went on to describe numerous seven-figure deals that were signed within weeks of those customers attending a boot camp. CEO Alex Karp was equally bullish, calling it “an unprecedented opportunity.”

The icing on the cake was Palantir’s forecast, as management boosted its full-year guidance to roughly $2.75 billion at the midpoint of its guidance, which would represent year-over-year growth of 23%, while increasing estimates for U.S. commercial revenue to grow 47%, up from 45% just last quarter.

The AI gold rush is expected to continue for years if not decades, and Palantir is well positioned to profit from this secular tailwind, which is why the stock is a buy.

The post Why Palantir Technologies Stock Rallied on Tuesday appeared first on The Motley Fool Canada.

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Fool contributor Danny Vena has positions in Palantir Technologies. The Motley Fool recommends Palantir Technologies. The Motley Fool has a disclosure policy.

Since early last year, investors have embraced the potential of artificial intelligence (AI), scooping up shares of those companies best positioned to profit from this groundbreaking technology. However, a long bull run and stretched valuations had many investors wondering if the ongoing rally could continue. In recent weeks, some have taken a step back, looking for further evidence the accelerating adoption of AI would continue.

With that as a backdrop, as of 1:08 p.m. ET on Tuesday, chipmaker Nvidia (NASDAQ: NVDA) jumped 6.4%, foundry Taiwan Semiconductor Manufacturing Company (NYSE: TSM) climbed 5.8%, semiconductor and AI specialist Broadcom (NASDAQ: AVGO) rallied 4.5%, and chip designer Arm Holdings (NASDAQ: ARM) rose 3.9%.

A check of all the usual sources — earnings results, changes to analysts’ ratings, and regulatory filings — turned up little in the way of company-specific news that helped push these AI stocks higher (more on that in a moment). That said, there was one obvious catalyst that helped spark a relief rally for AI stocks.

Solid AI-fueled results

Fellow AI specialist Palantir Technologies (NYSE: PLTR) reported its financial results, which helped put to bed fears that AI adoption is slowing. In the second quarter, the company generated revenue of $678 million, up 27% year over year, resulting in adjusted earnings per share (EPS) of $0.09. For context, analysts’ consensus estimates were calling for revenue of $652 million and EPS of $0.08, so Palantir surpassed expectations on both counts.

In addition to the company’s solid results, Palantir also increased its forecast, giving investors confidence AI still has room to run. Management now expects full-year revenue of $2.75 billion at the midpoint of its guidance, representing growth of 23%. The company cited the strong performance of its U.S. commercial business, as revenue of $159 million soared 55% year over year. Palantir now expects the segment to grow at least 47% for the year, up from its previous guidance for 45% growth issued just three months ago.

If that weren’t enough, management commentary suggested there’s more to come. CEO Alex Karp suggested the current wave of AI adoption represented “an unprecedented opportunity.”

Other developments

There were also a couple of company-specific developments in the space, but the impact would best be described as mixed:

• Analysts at New Street Research upgraded Nvidia stock to buy from neutral (hold), while simultaneously issuing a price target of $120. That represents potential upside for investors of 19% compared to the stock’s closing price on Monday. The analysts cited the recent 26% correction, saying such pullbacks are “healthy,” presenting “an opportunity to gain more exposure” to the stock.
• On the other side of the coin, noted activist investor Elliott Management said Nvidia is in a “bubble,” calling AI overhyped, according to a report in The Financial Times.
• Loop Capital analyst Ananda Baruah lowered his price target on Arm shares to $110, down from its previous level at $120, while maintaining a buy rating on the stock. He cited the company’s in-line financial results in the June quarter and in-line guidance for the September quarter, though he believes the overall thesis is “intact.”

While it’s clear that all AI companies can’t be painted with the same brush, Palantir’s robust results show that businesses are continuing to migrate to the technology, suggesting the trend is ongoing.

The recent sell-off has moderated some valuations, but value investors continue to be put off, a view I would suggest is myopic. High-growth stocks, like those involving AI, generally command a higher multiple than average, so using other valuation metrics can be informative.

For example, Arm Holdings, Nvidia, Broadcom, and TSM are selling for 73 times, 39 times, 31 times, and 24 times forward earnings, respectively. For value-minded investors, TSM might be the only one worth buying, but this fails to account for the accelerating growth trajectory of these companies resulting from AI. Using the more appropriate forward price/earnings-to-growth (PEG) ratio, which factors in that growth, each stock has a multiple of less than 1, the standard for an undervalued stock.

Furthermore, the use of generative AI has only just begun, with the adoption curve potentially lasting years. The best strategy for investing in this type of groundbreaking technology is to buy the best AI-related companies you can find and hold on for the wild ride ahead.

The post Why Nvidia, Taiwan Semiconductor Manufacturing, Arm Holdings, and Other Artificial Intelligence (AI) Stocks Rallied on Tuesday appeared first on The Motley Fool Canada.

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Fool contributor Danny Vena has positions in Nvidia and Palantir Technologies. The Motley Fool recommends Nvidia, Palantir Technologies, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.