These two companies are taking advantage of lucrative growth trends that are here to stay.
The S&P 500 index has already racked up impressive gains of almost 11% in 2024. Even better, the index is expected to move even higher thanks to tailwinds like cooling inflation fueling rate cut speculation and further adoption of artificial intelligence (AI) technologies among many component companies.
According to independent London-based research firm Capital Economics, the (which is at 5,354 at the time of this writing) could rise to 6,500 by the end of next year. That's a roughly 23% jump over the next 18 months or so.
Given the current bull market enthusiasm fueled by anything AI as well as talks of rate cuts, investors would do well to give some consideration toward buying shares of C3.ai (AI 0.23%) and Arm Holdings (ARM -0.41%). These are two growth stocks that seem primed for impressive gains thanks to these two catalysts. Let's look at the reasons why these two stocks could head higher in 2024 and beyond.
1. C3.ai has stepped on the gas
Shares of C3.ai underperformed the broader market so far this year (up just 6.4%). They were actually negative for the year until the May 29 release of its fiscal 2024 fourth-quarter results (for the three months ended April 30) sparked some investor enthusiasm. Investors gave C3.ai's quarterly performance a big thumbs up as its results point toward better times ahead.
C3.ai sells enterprise AI software, a market expected to proliferate in the long run. Precedence Research estimates that the enterprise AI market could go from generating $7 billion in annual revenue in 2022 to $270 billion in 2032. This explains why C3.ai's software solutions are gaining solid traction.
The company struck 191 agreements with clients in the previous fiscal year for its offerings, an increase of 52% from the previous year. These agreements point toward a healthier future for C3.ai and should ideally help the company sustain the acceleration in its revenue growth.
More specifically, C3.ai ended the previous quarter with a 20% year-over-year jump in revenue to $86.6 million. For comparison, the company's year-over-year revenue growth stood at 18%, 17%, and 11%, in the preceding three quarters.
C3.ai management forecasted $84 million to $89 million in revenue in the current quarter. That would be a 20% jump over the prior-year period's figure at the midpoint. However, don't be surprised to see C3.ai's revenue growth accelerating and landing at the higher end of its guidance range, or even exceeding that, as it has 123 pilot projects in progress across different industries.
What's more, the midpoint of C3.ai's full-year revenue guidance of $370 million to $395 million points toward a 23% increase in its top line this year. Again, that would be a nice improvement over the 16% revenue growth the company reported in the latest fiscal year.
Even better, analysts forecast the company's earnings to increase at an annual rate of 50% for the next five years, and it won't be surprising to see C3.ai achieving that, considering the huge opportunity it is sitting on in the AI software market. As such, investors should consider buying this growth stock, as it could soar higher this year, and in the long run, as the growing adoption of AI software could help it sustain its momentum.
Arm Holdings will benefit from the semiconductor market's growth
Arm Holdings stock is soaring so far in 2024 (up 67%), and the health of the semiconductor market indicates that the rise isn't likely to be temporary.
Part of the reason for that is the global popularity of Arm's chip architecture. It is estimated (via Forbes) that more than 250 billion CPU chips (like the ones in smartphones, laptops, and tablet computers) in use today were manufactured using Arm's intellectual property (IP). Just over 30 billion of those chips were shipped last year. A whopping 99% of mobile processors are manufactured using Arm's designs, and its share of the automotive market stands at just under 41%.
Arm management pointed out in its fiscal 2024 fourth-quarter earnings presentation that its overall share of the chip architecture market stands at 51%. That figure looks set to move higher thanks to AI, as more companies are now signing up to use Arm's architecture to develop AI chips. That's translating into an improved backlog and faster revenue growth for Arm.
The company expects its revenue to land between $3.8 billion and $4.1 billion in fiscal 2025. That would be a 22% increase at the midpoint over the previous fiscal year, when its top line increased 20%. However, the faster growth in Arm's remaining performance obligations (RPO), a metric that refers to the total value of the contracts that it is yet to fulfill, suggests that it could exceed its guidance.
Arm's RPO increased an impressive 45% year over year to $2.5 billion in the previous quarter thanks to an increase in the number of chip design agreements that it signed with customers. This probably explains why analysts expect its top line to land at the higher end of its guidance range in the current fiscal year, followed by robust growth over the next couple of years as well.
ARM Revenue Estimates for Current Fiscal Year data by YCharts
This improvement in the company's top line is set to translate into stronger earnings growth as well thanks to Arm's business model, under which it doesn't manufacture chips but provides the architecture and IP to clients.
ARM EPS Estimates for Current Fiscal Year data by YCharts
So, there is a good chance that the market will continue rewarding Arm stock with more upside because of the accelerated earnings growth that it is touted to deliver in the future. As such, investors who haven't bought this red-hot growth stock yet can consider doing so before it goes higher.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
