Artificial intelligence (AI) is rapidly transforming industries, with applications spanning generative AI, speech recognition, cybersecurity, robotics, and autonomous vehicles. The sector is projected to grow nearly tenfold by 2030, making it an attractive space for investors. However, with stock market valuations soaring in 2024, it has become crucial to identify strong companies at reasonable prices.
Market corrections, which typically occur once a year, offer an opportunity to invest in high-quality AI stocks at a discount. Two companies, Arm Holdings and SoundHound AI, stand out for their potential in the evolving AI landscape. While both exhibit promising growth trajectories, their current valuations may be too steep, making them ideal candidates for investors to watch for a more attractive entry point.
Arm Holdings: A Semiconductor Powerhouse Fueling AI Growth
Arm Holdings is a dominant force in semiconductor design, providing the architecture that powers over 99% of global smartphones. While its early success stemmed from mobile technology, the company is now expanding into AI-driven applications, including cloud computing, autonomous vehicles, and generative AI. Partnerships with major tech firms, such as Meta, reinforce its role in developing next-generation AI models.
Unlike conventional semiconductor companies, Arm does not produce chips itself but instead licenses its designs to other firms. This model allows it to generate revenue through royalties and licensing fees, ensuring a steady income stream. In fiscal Q2 2025, Arm reported $844 million in revenue, reflecting 5% year-over-year growth. While this may appear modest, management attributed it to the timing of major deals, suggesting stronger performance in upcoming quarters.
Although Arm has a promising future, its valuation raises concerns. The company trades at nearly 40 times its sales, with a market capitalization of $157 billion. Additionally, its price-to-earnings (P/E) ratio nears 100, making it one of the most expensive AI-related stocks. Given these factors, investors may find it more strategic to wait for a price dip or implement dollar-cost averaging to mitigate risks while securing a stake in this high-potential company.
SoundHound AI: A Leader in Voice Recognition Technology
As speech recognition technology becomes increasingly integrated into daily life, SoundHound AI is emerging as a key player in the field. The company specializes in conversational AI, powering voice commands in vehicles, AI-driven customer service, and automated ordering systems for drive-thrus and phone-based transactions. With automation becoming a necessity across various industries, SoundHound’s technology is expected to gain widespread adoption.
The company’s financials highlight its rapid expansion. In Q3, SoundHound reported an 89% year-over-year revenue increase, reaching $25 million. For 2024, it projects at least $82 million in revenue, with expectations of $155 million to $175 million in 2025—a near doubling of sales in just one year. Such aggressive growth underscores the increasing demand for AI-powered speech recognition solutions.
However, like Arm, SoundHound’s valuation remains a challenge. With a market capitalization of $5.15 billion, the stock trades at over 60 times 2024 sales projections and more than 30 times 2025 estimates. Additionally, the company has yet to achieve profitability, raising concerns about whether its stock price justifies its current valuation. On a positive note, SoundHound’s stock price has recently declined, potentially creating a better entry point for investors if the downward trend continues.
A Waiting Game for the Right Investment Opportunity
The AI sector continues to offer immense growth potential, making it essential for investors to monitor high-quality stocks that could benefit from long-term market trends. Arm Holdings and SoundHound AI stand out as strong contenders, given their leading positions in semiconductor design and speech recognition, respectively. However, both stocks are currently priced at high valuations, making a wait-and-watch approach advisable.
Market dips are inevitable, and when they occur, they present a strategic opportunity for investors to acquire shares in promising AI companies at more reasonable prices. Keeping a watchlist of potential buys, rather than jumping in at peak valuations, remains a prudent strategy for those looking to capitalize on AI’s rapid expansion while mitigating risks.
