3 Artificial Intelligence (AI) Stocks That Could Go Parabolic

The rapid growth of the artificial intelligence (AI) market has driven many stocks to record highs, with Nvidia surging 2,760% over the past five years. However, some investors may be reluctant to chase these breakneck gains. Here are three overlooked AI stocks with the potential to go parabolic: Innodata (INOD), MicroStrategy (MSTR), and Lumen Technologies (LUMN).

1. Innodata (INOD): Once a slow-growth IT services and enterprise software company, Innodata's stock soared from about $1 at the end of 2019 to about $32 today. This massive rally resulted from an AI-driven acceleration in its top line, with revenue rising 10% in 2023 and soaring 83% year over year in the first nine months of 2024. The company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 266% to $20 million, and it turned profitable on a generally accepted accounting principles (GAAP) basis. Innodata's explosive growth stems from its rollout of generative AI tools for five of the "Magnificent Seven" companies. For the full year, Innodata expects its revenue to soar in the range of 88% to 92% as more companies adopt its generative AI services. From 2024 to 2026, analysts expect its sales to have a compound annual growth rate (CAGR) of 25% as its adjusted EBITDA experiences a CAGR of 29%. Trading at 4 times next year's sales and 37 times its adjusted EBITDA, Innodata has already had a great run but could head even higher as it locks in more big tech companies with its data processing and AI capabilities. 2. MicroStrategy (MSTR): Once dismissed as a slow-growing enterprise software company, MicroStrategy started hoarding Bitcoin in 2020, holding 252,220 of the digital tokens with a current market value of $19.26 billion. This strategy could pay off if the top cryptocurrency's price skyrockets over the next few years. However, MicroStrategy is also a generative AI company. Last October, it rolled out MicroStrategy AI, a platform that enables companies to integrate generative AI features into their existing data applications. It expects these new features, along with the transformation of its on-site applications into cloud-based services, to stabilize the growth of its core software business as it accumulates more crypto. Analysts expect MicroStrategy's revenue to have a CAGR of 1% from 2023 to 2026, as it stays unprofitable on a GAAP basis. But the value of its Bitcoin holdings could keep growing, and its generative AI business could experience a sudden growth spurt like Innodata if it locks in more customers. 3. Lumen (LUMN): Lumen, the telecom company formerly known as CenturyLink, suffered five consecutive years of revenue declines. It was also unprofitable over the past two years and suspended its dividend in 2022. Its stock price dropped below $1 this June. Unlike many of its telecom peers, Lumen didn't expand into the wireless market to reduce its dependence on wireline connections. Instead, it doubled down on the slow-growth wireline market and bundled more cloud, security, and collaboration services with its business wireline plans. It also expanded into the higher-growth fiber market. Lumen originally expected to generate slow but stable growth as economies of scale kicked in, but its declining business wireline revenue consistently offset its rising fiber revenue. As a result, its rising costs overwhelmed its declining revenue, and its losses widened. However, over the past few months, Lumen struck a series of AI connectivity deals worth $5 billion, including one to upgrade the data center infrastructure of Microsoft's Azure cloud platform to handle more generative AI applications. These new deals lit a fire under Lumen's stock and drove it back to about $9. But even after that rally, its enterprise value of $25.5 billion is less than 2 times higher than its projected sales for 2024. Analysts expect its revenue to decline again in 2024 and 2025, but its new AI contracts could help it clear those low expectations. If that happens, Lumen's stock could go parabolic as it attracts more value-seeking investors.

While these AI stocks have the potential to go parabolic, investors should be aware of the risks and challenges they face. Innodata's dependence on a few large customers, MicroStrategy's exposure to Bitcoin's volatility, and Lumen's history of declining revenue and losses could impact their future growth prospects. However, if these companies can overcome these challenges and execute on their growth strategies, they could indeed become parabolic stocks in the AI space.
In conclusion, while AI stocks offer significant growth potential, investors should prioritize income-focused investments that generate stable profits and cash flows. The Income Method, advocated by the author, emphasizes the importance of consistent, inflation-protected income and capitalizing on undervaluations created by market perceptions. By diversifying investments across sectors like utilities, renewable energy, and REITs, investors can secure steady returns and weather market fluctuations.