Nvidia (NVDA 0.03%) and C3.ai (AI 1.18%) both believe they will benefit from the expansion of the artificial intelligence (AI) market, which recently gained a lot of attention with the rise of "generative AI" platforms like ChatGPT. Nvidia's top-tier GPUs are used to process complex machine learning and AI tasks in data centers, while C3.ai's algorithms add AI capabilities to an organization's existing applications.
Nvidia and C3.ai have rallied about 83% and 96%, respectively, so far this year as the bulls rush toward AI-related stocks. But will those gains be sustainable over the long term? Let's take a closer look at these two companies to decide.
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C3.ai: A catchy name with a shaky business
C3.ai was previously known as C3 Energy and C3 IoT (Internet of Things) before it rebranded itself as C3.ai in 2019. It subsequently generated a lot of buzz with that catchy name and its "AI" ticker symbol when it went public in late 2020.
But underneath those rebrandings, C3's core business hasn't changed all that much since its days as C3 Energy and C3 IoT. It still generates most of its revenue from the energy sector, and a massive joint venture with Baker Hughes still accounts for more than 30% of its revenue. That's deeply troubling because that agreement will expire in fiscal 2025 (which will end in April 2025), and there's no guarantee it will be renewed.
Last year, C3 also pivoted from subscriptions toward a usage-based model, which only collects fees when its services are accessed. The company insists that move will counter the macroeconomic headwinds that are discouraging enterprise customers from locking themselves into sticky subscriptions, but it's also severely throttling its near-term growth.
C3's algorithms can be plugged into an organization's software to automate tasks, cut costs, improve employee safety, and detect fraud -- but those optimization tools aren't comparable to OpenAI's ChatGPT or other generative AI platforms. C3 gained a lot of attention this January when it announced the development of new tools for generative AI platforms, but that merely means its algorithms are compatible with those platforms and doesn't guarantee any future revenue.
C3's revenue rose 38% in fiscal 2022, but it only anticipates 4% to 5% growth in fiscal 2023. It's still deeply unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP measures, and it isn't cheap, with an enterprise value of 7 times its estimated sales for fiscal 2023. In that light, C3 still seems like a risky stock that could easily be cut in half once the AI hype dies down.
Nvidia: The pick-and-shovel play of the AI market
Nvidia's business is built on a much firmer foundation than C3. It's the largest producer of discrete GPUs in the world, and its top-tier GPUs are widely used by generative AI platforms like ChatGPT to accelerate their AI processing capabilities.
Nvidia experienced a major growth spurt during the pandemic as consumers upgraded their gaming PCs to play more video games, sales of pre-built PCs soared as more people worked remotely and attended remote classes, and data centers upgraded their servers to process more cloud-based data. The spike in cryptocurrency prices amplified that surge as crypto miners upgraded their mining rigs with Nvidia's latest GPUs.
The company's growth cooled off after the pandemic waned. PC sales withered, macro headwinds forced data centers to rein in their spending, and the collapse of the cryptocurrency market caused miners to flood the market with secondhand GPUs.
Nvidia's revenue came in flat in fiscal 2023 (which ended this January), compared to its 61% growth in fiscal 2022, as its adjusted EPS fell 25%. However, analysts expect its revenue and earnings to grow 11% and 35%, respectively, in fiscal 2024 as it laps that slowdown, the growth of the AI market boosts its data center sales, and the crypto market recovers.
That outlook is encouraging, but Nvidia's stock still looks pricey at 60 times forward earnings. That frothy valuation suggests it's also being buoyed by all the recent generative AI hype -- and a harsh reality check could easily crush its shares. But looking beyond the valuation, Nvidia's core business is still stable, it has a wide moat, it's firmly profitable by both GAAP and non-GAAP measures, and it will likely remain an essential pick-and-shovel play on the high-end gaming and AI markets.
The obvious winner: Nvidia
I wouldn't touch either of these stocks until their valuations cool off. But once that happens, Nvidia will obviously be a better buy than C3.ai. C3 isn't doomed yet, but it raises too many red flags given its habit of chasing hot trends, decelerating growth, lack of profits, and overwhelming dependence on Baker Hughes.
