Nasdaq Sell-Off: Top 2 AI Stocks to Consider Before Their Prices Skyrocket

The Nasdaq Composite recently experienced a notable drop of 5% from its all-time peak, prompted by concerning economic indicators, which included the lowest consumer sentiment in over a year. Despite this pullback, several Wall Street analysts remain optimistic about significant growth opportunities for Arm Holdings and Axon Enterprise over the next year.

• Lee Simpson from Morgan Stanley has projected a bullish target of $300 per share for Arm, suggesting a potential rise of 120% from its current price of $136.
• Meta Marshall, also at Morgan Stanley, anticipates Axon's stock could reach $1,150 per share, indicating a 135% upside from its present value of $488.

Here’s an overview of these promising AI stocks.

Arm Holdings: 120% Growth Potential

Arm is a key player in the semiconductor industry, known for designing CPU architectures and licensing its intellectual property rather than selling chips directly. The company also develops software tools to assist programmers across various applications, spanning from mobile devices to data centers.

Its processors offer greater energy efficiency compared to competitors like Intel and AMD. As a result, Arm processors are integral to 99% of smartphones and 67% of other mobile devices. Recently, Arm has been expanding its market presence in data centers, thanks in part to enhanced chip capabilities, with notable companies like Alphabet, Amazon, Microsoft, and Oracle all utilizing custom CPUs built on Arm architecture.

In its latest quarterly report for fiscal year 2025, which ended in December 2024, Arm's revenue surged by 19% to $983 million, with significant gains in royalty fees tied to the number of products featuring Arm's IP. The company also reported a 26% increase in non-GAAP net income to $0.39 per diluted share.

During the earnings call, CEO Rene Haas commented on Arm's future in the AI sector, stating, "We strongly believe that the advances in AI, both for training and inference, are going to increase the demand for compute in the AI cloud. We expect Arm solutions to address the needs from the cloud to the edge." He further highlighted Arm's involvement in the Stargate Project, which aims to invest up to $500 billion in AI infrastructure within the United States.

Wall Street projects Arm's adjusted earnings to grow by 32% each year until the end of fiscal 2026, making the stock's current valuation of 96 times adjusted earnings appear high; however, it may not be unreasonable. While a 120% return in the coming year seems ambitious, investors may want to consider making a small investment in Arm.

Axon Enterprise: 135% Growth Potential

Axon is primarily focused on public safety, recognized for its Taser brand of conducted energy weapons. The company also provides a comprehensive range of sensors and software solutions aimed at law enforcement and government entities. Axon leads the market not only in conducted energy weapons but also in body cameras and digital evidence management software.

Axon integrates AI technology into its offerings. For example, its digital evidence management software utilizes AI to transcribe and redact audio and video content. Additionally, Axon Fleet cameras employ AI to read license plates across multiple lanes, instantly notifying law enforcement when there’s a match on a hotlist.

In April, Axon unveiled Draft One, a generative AI tool designed to automate report writing for law enforcement based on body camera footage. Remarkably, Draft One achieved a $100-million revenue pipeline faster than any other product in the company's history. CEO Rick Smith remarked, "We are positioning ourselves as the indisputable leader in delivering the power of AI in practical, usable applications."

Recently, Keith Housum from Northcoast Research downgraded Axon due to concerns about its valuation and a parting with Flock Safety, a partner in real-time crime technology. However, Meta Marshall of Morgan Stanley views this downgrade as an overreaction, suggesting that Axon's decision to terminate the relationship might indicate that they have a solution for the affected technology.

Despite a 32% decline in Axon shares following the downgrade, this may present an attractive buying opportunity. Analysts foresee the company's adjusted earnings growing at a rate of 22% annually through 2025. Although the current valuation stands at 99 times adjusted earnings, which seems high in comparison to these expectations, Wall Street often underestimates Axon's performance.

Over the past six quarters, Axon's earnings have exceeded consensus estimates by an average of 34% in dollar terms. If this trend continues, the current valuation could be justified. While an increase of triple digits in Axon’s stock might not be expected in the next year, investors willing to embrace some volatility may want to think about starting a small position.

Nasdaq, Stocks, AI