The emergence of ChatGPT in late November captured the public imagination while simultaneously sparking an artificial intelligence (AI) arms race. The human-like interaction of this next-generation chatbot attracted roughly 100 million users within its first two months of availability, making it something of an AI prodigy.
As a result of the publicity and public fascination, investors sensed an opportunity for profit, flocking to stocks positioned to benefit from the next stage of the AI revolution. They could be onto something. The global AI market could be worth as much as $14 trillion by 2030, according to the folks at Cathie Wood's Ark Investment Management.
Three stocks have led the charge in 2023, generating triple-digit gains over the past six months. Two still represent compelling investment opportunities, while one has yet to prove it can stand the test of time. Let's look at the three biggest winners in recent months to determine which ones are still worth a look.
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1. C3.ai -- up 230%
C3.ai (AI 0.09%) has been a mixed bag for investors. The stock is currently down more than 80% from its peak but has recently been squarely in rally mode, gaining roughly 230% since late December and more than tripling from its 52-week low.
While the surge in interest in all things AI has boosted C3.ai, investors should approach the stock with caution. When it debuted, the company provided subscription-based software-as-a-service (SaaS) applications that helped enterprise-level businesses rapidly deploy AI. However, as the economy tanked, so did its fortunes, and C3.ai was forced to switch its pricing plan to a usage-based model. The jury is still out as to whether this move will ultimately be successful.
Investors need only peruse the financials and the challenges that remain clear. For its fiscal 2023 third quarter (which ended Jan. 31), revenue of $66.7 million declined 4% year over year. Subscription services, which represents the bulk of its revenue, was roughly flat, while professional services -- which tend to be lumpier -- slumped 24%. At the same time, the company's remaining performance obligation (RPO) -- a leading indicator of future demand -- climbed by just 7%.
While C3.ai has generated the biggest stock price gains, that was on the back of a precipitous fall from grace. However, even down 80% from its peak, the stock still trades at 12 times next year's sales -- a pricey valuation, particularly for a company in the midst of a turnaround. A host of new partnerships and cloud deals has given investors hope for the future, but C3.ai should still be a small part of a balanced portfolio.
2. Nvidia -- up 149%
It's little wonder that Nvidia (NVDA -3.33%) stock stands to benefit from the rise of AI. The company's graphics processing units (GPUs) are the gold standard for conducting cloud computing, and AI operations in the ether are the yardstick by which all other chipmakers are measured. Excitement regarding the further proliferation of AI has driven the stock up 149% since mid-October.
Yet, the anchor that has held Nvidia back isn't its AI proficiency but its gaming segment, which has struggled over the past year as inflation ate into buying power, forcing gamers to put off an upgrade to the latest gaming processor. There's good news, however, as some analysts predict that the current downcycle will reverse course as early as the current quarter. If that's the case, Nvidia's gaming segment will provide a boost fueled by pent-up demand for its state-of-the-art semiconductors.
Furthermore, it doesn't matter who wins the current AI arms race, as Nvidia has the most to gain. At the company's recent GPU Technology Conference, Nvidia rolled out AI-as-a-service (AIaaS), which will facilitate the adoption of AI by companies of all sizes, further fueling the demand for its lightning-fast processors.
Nvidia stock is by no means cheap, trading for 18 times next year's sales. That said, investors frequently award a premium valuation to a stock with a strong history of growth -- and Nvidia certainly qualifies. Furthermore, analysts' consensus estimates expect Nvidia to grow revenue by 34% this year and 32% in 2024, suggesting that Wall Street expects the company's history of outperformance to continue.
3. Meta Platforms -- up 140%
While not a pure-play AI stock, Meta Platforms (META -0.52%) has AI at the heart of everything it does. The social media giant uses its sophisticated algorithms to tag people in photos, suggest content, and ensure its digital advertising -- which generates the lion's share of its revenue -- targets those consumers most likely to make a purchase. If you've been searching for something online and an ad for that product suddenly appears in your Facebook feed, that's Meta's AI hard at work. This has helped fuel the stock's gain of 140% since early November.
Over the past year, macroeconomic headwinds have weighed on Meta as marketers pulled back on advertising spending to shore up financial statements and better position themselves to ride out the tough times. This presents challenges for Meta, which saw its fourth-quarter revenue decline 4% year over year, marking the third consecutive quarter of year-over-year declines.
Yet, history suggests that ad tech stocks begin to recover ahead of an economic rebound. For example, the Great Recession officially ended in June 2009, but by then, Alphabet stock (then Google) -- the leading digital advertiser -- had already climbed 49% from its late-January trough and eventually doubled that year. While this certainly isn't an apples-to-apples comparison, it strongly suggests that Meta Platforms stock will rebound ahead of an economic recovery.
In fact, that rebound may have already begun, but there's likely more in store, as Meta is still 44% off its peak. Furthermore, at just 4 times next year's sales, it's a small price to pay for a stock that is expected to surge 52% in the coming 12 to 18 months, according to Wall Street.
