Throughout history, technology has never advanced as quickly as it is right now. It's becoming harder than ever for investors to track the sheer number of innovative tech companies in the public markets, each offering its own unique vision for the future.
But perhaps no technology is more transformative than artificial intelligence (AI), which is already being deployed to complete highly complex tasks in a fraction of the time that humans can. According to one estimate, up to 70% of companies worldwide will have integrated some form of AI into their businesses by 2030, adding $13 trillion in additional output to the global economy.
There will be no shortage of opportunities in the sector over the next decade, but these two stocks might be a great place to start given they're trading at hefty discounts to their all-time highs amid the broader tech sell-off.
1. The case for C3ai
C3ai (AI 3.02%) is a first-of-its-kind enterprise AI company. Its stock is volatile because the company isn't profitable yet, and its revenue growth has underperformed expectations since it was listed on the public markets in December 2020. But that's often part and parcel of breaking ground in a brand-new industry.
C3.ai is a good place to start for investors who want exposure to the artificial intelligence sector because it builds both ready-made and customizable AI applications for 11 different industries. For most of its customers, C3.ai is the one-stop source for their AI needs, and it's possible they wouldn't otherwise have access to the technology.
The oil and gas industry is C3.ai's largest contributor to revenue, making up 54% of its $252 million in fiscal 2022, which ended on April 30. The company's technology helps oil behemoths like Shell track thousands of pieces of equipment to predict potentially catastrophic failures, saving time, money, and negative environmental impacts. C3.ai has an entire suite of applications just for the fossil fuel sector, which also helps those companies manage carbon emissions to run cleaner businesses.
But C3.ai has also drawn recognition from the largest tech companies in the world. It has partnerships with both Microsoft and Alphabet's Google to collaboratively develop AI applications to better serve their customers using cloud computing technology.
C3.ai's stock price is down 88% from its all-time high, so it carries inherent risks. The company lost $192 million in fiscal 2022 (which ended April 30), but importantly, it has $959 million in cash, equivalents, and short-term investments on its balance sheet -- which means it can run at that loss rate for the next five years before it needs more money. C3.ai has a high gross profit margin of 81%, so once it achieves scale, it can cut back its operating costs to generate positive earnings. But the key question is how long it will take to get there, if at all. With new businesses in new industries, it's always an unknown.
But C3.ai estimates its AI software opportunity could be worth $596 billion by 2025. Since the company's market value is only $2 billion now, it might be worth a small bet for investors with some risk appetite.
2. The case for Upstart
Upstart Holdings (UPST 2.76%) offers a great example of how artificial intelligence is being used to improve decades-old processes. Its AI-powered algorithm is designed to replace Fair Isaac's FICO credit scoring system, which is the traditional means of assessing a potential borrower's creditworthiness. Upstart can analyze as many as 1,600 data points about an applicant to deliver a loan decision almost instantly 74% of the time, a feat that might take human assessors days or even weeks to determine.
Fifty-seven banks and credit unions have signed on to use Upstart's algorithm, and one bank, in particular, has abandoned FICO scores altogether in its favor. This is key because Upstart isn't a lender; it originates loans for its bank partners in exchange for a fee. But the company was forced to deviate from this strategy slightly in the recent first quarter of 2022 amid turbulent credit market conditions. Upstart absorbed $345 million worth of new loans using its own balance sheet, which spooked investors.
This added to the $252 million worth of loans it already held mostly for research and development purposes. Management says the increase is only temporary, and it's important to note the $345 million jump represented just 7% of the total $4.5 billion in originations during the quarter.
It's partly a symptom of Upstart's rapid growth, which is bolstered by its entry into the automotive loan origination space. Since launching its car sales and origination software in 2021 called Upstart Auto Retail, 35 car makers have adopted the platform across 525 dealerships. That's up 224% from 162 dealers in Q1 last year.
Upstart generated $849 million in revenue during 2021, a whopping 264% year-over-year jump. It thinks revenue could top $1.25 billion this year, and while that's a slowdown in growth, consumers are contending with higher interest rates and tougher economic conditions, which could dampen demand for credit.
But the company continues to expand into what it estimates is a $6 trillion addressable opportunity. With its stock price down 90% from its all-time high, it might be a great chance to make a long-term bet on what could be the future of credit assessments.
