Interest in artificial intelligence (AI) applications jumped significantly over the past few months thanks to the massive popularity of OpenAI's chatbot ChatGPT. It's triggered an AI arms race between technology giants, which are now scrambling to develop their own AI applications capable of generating content such as images, videos, text, poetry, and code.
Not surprisingly, the generative AI market is expected to boom over the next decade. Market research firm The Brainy Insights forecasts the generative AI market to hit $188 billion in revenue by 2032 from just $8 billion last year, posting a compound annual growth rate (CAGR) of 36%. This rapid growth is going to create a massive opportunity for the likes of Nvidia (NVDA 3.71%) and C3.ai (AI -0.85%), two companies that are right in the middle of the AI revolution.
In fact, both AI stocks have been on hot streaks on the stock market in 2023. While Nvidia is up about 77%, C3.ai stock has shot up a whopping 93%. So it is safe to say that Nvidia and C3.ai are already on bull runs, and it wouldn't be surprising to see them sustain their hot momentum for a long time to come. Let's look at the reasons why.
Nvidia is providing the firepower for generative AI
A recent blog post by Microsoft (NASDAQ: MSFT) reveals how critical Nvidia's hardware is for the proliferation of AI applications such as chatbots. Microsoft and OpenAI leaned on "thousands of Nvidia AI-optimized GPUs linked together in a high-throughput, low-latency network based on Nvidia Quantum InfiniBand communications for high-performance computing."
The blog added that the "scale of the cloud-computing infrastructure OpenAI needed to train its models was unprecedented -- exponentially larger clusters of networked GPUs than anyone in the industry had tried to build." Third-party estimates put the number of Nvidia GPUs powering ChatGPT at 10,000. That number is expected to jump beyond 30,000 to scale up ChatGPT, though it wouldn't be surprising to see the chatbot require more Nvidia graphics processing units (GPUs) as OpenAI and Microsoft are looking to deploy it in commercial applications.
For instance, Microsoft has made ChatGPT available on its Azure cloud computing platform. The company's customers can now use large language AI models for various enterprise applications such as accelerating code development, improving email marketing, enhancing the search experience in Bing, and improving collaboration and efficiency in Microsoft Teams.
Microsoft claims that it already has more than 1,000 customers using the Azure OpenAI service, which gives them access to large language models such as ChatGPT, Dall-E 2, and Codex, among others. The company also started billing customers for the service. As a result, it wouldn't be surprising to see companies scale up their generative AI infrastructure in the future as they monetize it, and that's going to unlock a massive opportunity for Nvidia to boost its revenue.
Citigroup, for example, estimates that increased adoption of ChatGPT alone could add between $3 billion and $12 billion in revenue for Nvidia over the coming year. Nvidia generated $27 billion in revenue in the trailing 12 months, so Citi's estimate suggests that one application alone could move the needle in a big way for the company. Additionally, Morgan Stanley analyst Joseph Moore recently upgraded Nvidia stock to "buy" with a $304 price target, citing the strong spending on AI and large language models in the short and long runs as catalysts for the company.
Moreover, ChatGPT is one of many generative AI applications, and it is worth noting that Amazon, Meta Platforms, and Alphabet also are targeting this space. The nascent generative AI market could keep growing at a nice clip in the long run. This would create the need for more Nvidia GPUs, which could eventually translate into solid stock market returns for the chipmaker.
C3.ai could benefit from the massive enterprise AI software market
While Nvidia stands to gain from the hardware side of AI, C3.ai could win big from the huge spending on enterprise AI software. Precedence Research estimates that the AI software market could be worth nearly $1.1 trillion by 2032, compared to just over $200 billion at the end of last year.
C3.ai provides a platform that allows enterprises to build AI applications in an efficient and cost-effective manner. The company has built a solid customer base that includes Shell, Duke Energy, Baker Hughes, and many others. It has also partnered with major cloud computing platforms such as Microsoft Azure, Amazon Web Services, and Google Cloud, through which its services are made available to a wide range of users that help C3.ai land new customers.
C3.ai's offerings are finding traction in the market. The company finished the third quarter of fiscal 2023 with a total of 27 deals, up from 20 in the prior-year period. C3.ai should be able to sustain its strong deal-growth momentum thanks to a change in its business model.
The company is transitioning from a subscription-based model to a consumption-based one. This could help C3.ai attract more customers, as potential users won't have to enter into long subscription agreements and can simply pay for the company's offerings as they use them. The company believes that it can scale up the consumption-based business model faster than the subscription business within eight quarters of beginning the transition.
The pivot could weigh on C3.ai's growth in the near term, but analysts expect growth to pick up the pace as the transition gains momentum. C3.ai's revenue is expected to increase by only 5% in the current fiscal year to $265 million. But a sharper jump is expected in the next couple of fiscal years, as the chart indicates.
AI Revenue Estimates for Current Fiscal Year data by YCharts
However, investors may find C3.ai stock expensive, as it is trading at 8.8 times sales right now. Though that's rich when compared to the S&P 500's sales multiple of 2.3, investors should note that the stock is cheaper than a stock like Nvidia, which sports a sales multiple of 24 and is facing headwinds in certain areas. So growth investors looking for an AI stock that could continue soaring should consider buying C3.ai before it is too late and becomes more expensive.
