The artificial intelligence (AI) revolution is well underway, with companies like NVIDIA (NASDAQ:NVDA) and C3.ai (NYSE:AI) being some of the most visible pioneers. However, their sky-high valuations mean investors are essentially betting on flawless execution. On the other hand, lesser-known AI stocks are flying under Wall Street’s radar. These companies could generate tremendous upside. Just as the gold mining supply companies made fortunes selling picks and shovels to miners during the 19th century California Gold Rush, investors today can profit from the AI boom by investing in essential “picks and shovels” companies.
Specifically, semiconductor manufacturers, cloud infrastructure providers, and AI chip designers are integral to delivering the computing power and specialized hardware needed to develop and scale AI. Though not as flashy as the AI software stars, these nuts-and-bolts companies provide the critical tools to enable widespread AI adoption. In effect, they provide the picks and shovels for the 21st-century AI Gold Rush.
Consequently, smart investors should focus beyond just the AI giants to identify underappreciated stocks poised to benefit immensely from accelerating AI deployment. As always, I would caution that AI startups naturally carry a lot of risk, and you should keep that in mind when investing. That said, let’s get into these stocks!
Skywater Technology (SKYT)
Skywater Technology (NASDAQ:SKYT) is an exciting AI semiconductor stock that has seen its share of ups and downs over the past year. The stock is currently trading near its 52-week low around $6 per share, sinking from highs of more than $33 in 2021. However, there are several reasons to believe the stock may be poised for a rebound.
Skywater specializes in providing custom silicon solutions, and has carved out a unique niche working with the U.S. Department of Defense on strategic initiatives like manufacturing radiation-hardened chips. The company just reported strong Q2 2023 results, with revenues of $69.8 million beating estimates by 9%. This marked the fourth straight quarter of record revenues for Skywater.
Importantly, Skywater’s growth is coming even as the overall semiconductor market faces headwinds. While industry giants lower guidance, Skywater has reiterated full-year guidance of more than 25% revenue growth. The company’s partnership with the U.S. government provides investors with revenue stability, as defense customers actually increase engagement to accelerate key programs.
In addition, Skywater supports superconducting and photonic technologies used in emerging fields like quantum computing and artificial intelligence. The company works with innovators to move projects from lab to fabrication. Thus, Skywater has the specialized capabilities and credibility to position itself as a leader in what many believe will be the future of computing.
In my opinion, Skywater is poised to buck the downtrend soon. The beaten-down stock price offers a compelling entry point at these levels. If macro conditions improve at all, Skywater has plenty of potential to recapture its previous highs above $20. That’s $2 above what analysts expect on average, implying 200% upside over the next year.
SoundHound AI (SOUN)
In the world of AI software, an intriguing and relatively under-the-radar name is SoundHound AI (NASDAQ:SOUN). While voice recognition has become ubiquitous through digital assistants like Alexa and Siri, SoundHound stands out by allowing companies to customize conversational AI. SoundHound’s technology platform allows businesses to interact with customers using customized voices and more advanced speech recognition. Rather than just executing pre-programmed commands, SoundHound’s AI aims to engage in natural conversations and understand context and meaning.
SoundHound also recently rolled out added capabilities like SoundHound Chat AI that infuse large language models to make conversations more natural. This has the potential to significantly boost usage, and revenue per enabled device, as the AI becomes smarter and more useful.
The global conversational AI market is forecast to grow at an over 24% compounded annual growth rate (CAGR) to reach $41 billion by 2030, according to Grand View Research. SoundHound has already achieved a $2.8 billion revenue run rate with room for massive expansion. The stock trades at a fraction of rivals like Nuance Communications, which Microsoft (NASDAQ:MSFT) acquired for almost $20 billion.
Meanwhile, SoundHound has a modest $483 million market cap that leaves substantial upside if it sees wider adoption. As AI interactions become increasingly humanized, keep an eye on this emerging software player. The consensus analyst price target at $5 puts the one-year upside potential for SOUN stock at 151%.
LZG International (LZGI)
For investors with higher risk tolerance, LZG International (OTCMKTS:LZGI) presents a potential home run opportunity. The tiny stock currently trades at just a $46 million market cap, despite explosive growth projections. The company operates an AI-powered knowledge platform that provides data analytics to small and mid-sized enterprises, effectively meaning the company competes with giants like McKinsey and Palantir (NYSE:PLTR) in leveraging AI to turn raw data into actionable insights.
After a difficult 2022, LZG bounced back in spectacular fashion from April to July this year, surpassing $1 per share. However, it has now since declined back to 30 cents. This move comes despite impressive top-line growth, with revenues for the most recent quarter surging 155% quarter-over-quarter to $24 million. Importantly, this growth acceleration is expected to continue into 2024. Analysts expect sales to soar 150% year-over-year to $104 million, and for the company to swing back to profitability.
Despite the company’s hypergrowth status, LZG maintains a paltry valuation of around 0.5-times 2024 revenues. This seems extremely cheap compared to high-multiple AI peers if the company even comes close to achieving its full potential.
In my eyes, this represents a classic case of an undiscovered microcap gem flying under Wall Street’s radar. However, the underlying business is just hitting stride with triple-digit growth. For investors aggressive enough to take the plunge, LZG could deliver exponential returns if it executes according to plan. There is one analyst rating on this stock, implying 1566%-plus upside with a $5 price target.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
