AI Stocks Hoped to Repeat 2024 Success

Tech stocks focused on AI surged last year, driving overall market gains that traders hope will persist into the current year.​

No Top in Sight

Renowned for its high-tech weighting, the Nasdaq has nearly doubled in just two years – the best performance of the century thus far. Fueled by breakthroughs in AI and further boosted by nuclear and quantum computing developments in the same area, the rally positioned stocks like Nvidia to vie for the top spot among the most valuable companies in the world. Despite outperforming significantly to the benefit of investors, many AI stocks still boast triple-digit P/E ratios, prompting traders to question the sustainability of the gains.

Some analysts expect a rebound in AI-backed stocks after a year-end pullback as AI capital expenditure shows no signs of slowing down, with close attention paid to major earnings for any signs of deceleration. A combination of a more favorable regulatory environment expected under the upcoming Trump administration, tech reshoring and investors seeking the next breakout name could offer opportunities moving forward. Interestingly, companies selling AI have failed to see solid gains, while those servicing AI, such as server and chip companies, and leveraging AI to develop products like improved communication apps have experienced stronger success.​

AI Darlings of 2024

Last year, Nvidia surged 171% due to strong demand for its AI chips, consistently outperforming analyst sales expectations. However, being a major player leaves the AI leader vulnerable to market fluctuations. Investors are also concerned that higher interest rates could dampen demand despite strong demand for its products.

On the other hand, smaller companies like SoundHound AI experienced massive breakthroughs thanks to AI, with its share price skyrocketing over 1000% last year. The company's voice technology leveraged AI to gain major clients, significantly expanding its customer base. Similarly, Palantir soared 360% over the year. The company also attributed its success to AI, a key selling point for its software solutions that enable customers to interact more efficiently with their products.​

SoundHound Eyes Reversal

SoundHound AI might be near the end of its deep correction, as its dead-cat-bounce (DCB) extension has been achieved at $13 per share. Forming a double bottom amid a potential false break to $12.40 also suggests an upside reversal, though pressure towards the nearby $10.30 swing may still be sustained. An initial break above $14.50 and $16 could fuel momentum towards the $20 handle, reducing the distance to the record peak of $25 and opening the door to $30. However, breaking below $10 might invalidate the bullish setup completely, potentially leading to an elongated bear market with supports at $7.80 and $5.

Source: SpreadEx / SOUNDHOUND AI

Key Takeaways

AI stocks boosted overall market gains in 2024, with analysts expecting a rebound after a year-end pullback despite triple-digit P/E ratios as AI capital expenditure shows no signs of slowing. Companies servicing AI, like server and chip firms, experienced more success than those selling AI products. Nvidia surged 171% due to the strong demand for its AI chips. At the same time, smaller firms like SoundHound AI and Palantir saw share prices skyrocket over 1000% and 360%, respectively, leveraging AI for voice technology and software solutions. SoundHound AI might be nearing a downside reversal, though breaking below $10 could invalidate the bullish setup.​