What is generative artificial intelligence (AI)? In short, it's a type of AI that can create content like text, images, audio clips, videos, and even computer code.
Generative AI has taken the world by storm in 2023, thanks in particular to a private company called OpenAI, which developed the popular ChatGPT online chatbot. But here's the question investors are asking: Will this new technology live up to the hype from a financial perspective?
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Generative AI could transform the economy
The answer to that question is likely yes, but it will take time. According to Ark Investment Management, which is run by top technology investor Cathie Wood, generative AI software like ChatGPT could add $200 trillion to global economic output by 2030.
For perspective, global gross domestic product is expected to come in at $106 trillion this year, so Ark is expecting AI will drive a full-on growth explosion by the end of the current decade.
The firm believes the cost to train generative AI models to GPT-3 capability will decline by 70% per year between now and then, meaning a business could deploy a sophisticated large-language model for just $30 in 2030. That would be down from $4.6 million in 2020!
As a result, a typical computer programmer using an AI-powered coding assistant (like ChatGPT or Copilot) could become 10 times more productive. Knowledge workers like lawyers and scientists could also substantially speed up their workloads by using AI to analyze mountains of data in an instant. Those productivity gains form the basis of Ark's economic estimate.
Companies like Duolingo and even Coca-Cola have partnered with OpenAI to weave this technology into their businesses. Then there's Microsoft, which recently committed to invest billions of dollars directly into OpenAI.
But there are other players in this industry besides OpenAI that are making really exciting progress. Here are two of them investors can buy right now.
1. C3.ai
C3.ai (AI -0.85%) has been helping businesses harness the power of AI since 2009. The company is credited with creating an entirely new industry called enterprise artificial intelligence that delivers ready-made and customizable applications to customers, which saves them from having to develop the technology entirely from scratch.
That's why companies in industries like financial services, manufacturing, and fossil fuels are among C3.ai's biggest spenders. Those organizations aren't always equipped with the resources to build advanced technologies in-house, so C3.ai accelerates their progress.
The company's generative AI offering is comprehensive. Its chatbot integrates with an organization's network, so employees can use it to instantly access data and information stored within the company. It will also answer follow-up questions to help refine its responses.
C3.ai says customers are using it to track environmental, social, and governance initiatives; identify revenue opportunities and risks, and assess the health of asset portfolios.
The company is in the midst of an important transition. It has always charged customers on a subscription basis, but onboarding them was a lengthy process involving price negotiations and decisions about term length. C3.ai says that's a hindrance to its growth potential, with revenue expected to increase by just 4.8% year over year in fiscal 2023 (ending April 30).
It's now switching to a consumption (pay-per-use) model, which offers customers transparent pricing, quick onboarding, and the ability to come and go as they please. C3.ai says this will result in revenue returning to growth of more than 30% from fiscal 2024 onward.
C3.ai stock has performed extremely well this year, jumping 61% on the back of investors' interest in AI. But its current share price of $17.85 is well below its all-time high of $161, as the company has failed to live up to growth expectations since its listing in December 2020. Plus, it recently came under attack by a short-seller claiming there are discrepancies in its financial statements. The company is yet to respond.
With emerging technologies, investors need a high appetite for risk when buying stocks like C3.ai. However, it might be a great way to gain exposure to the AI industry, and if the company is successful, the bet could pay off in a big way.
2. SoundHound
SoundHound AI (SOUN 3.74%) was started in a Stanford University dorm room in 2005 by founders who believed conversational AI marked a new frontier in computing. It turns out they were right, because the company has attracted a star-studded lineup of customers including SnapChat parent Snap, Netflix, Mastercard, and Mercedes-Benz, to name just a few.
SoundHound has developed a range of turnkey products, including a text-to-speech tool, automatic speech recognition, and content recognition that prevents copyright breaches. It has also built an AI-powered platform for restaurant ordering by phone, and a proprietary technology called Deep Meaning Understanding, which it says can recognizes human intent in conversation and has the ability to field multiple voice questions at once.
The company continues to evolve, and it just released Conversational AI Networks (CAINET), which can connect to SoundHound's internal generative AI models in addition to external models like OpenAI and ChatGPT, which opens a new realm of possibilities.
SoundHound has a three-pillar business strategy. First, its conversational AI powers devices and cars, where users can have in-depth conversations with their virtual assistants. Second, SoundHound is transforming customer service with its enterprise solutions, allowing businesses to use AI-powered agents to handle customer interactions. The third pillar relates to monetization, and the way in which the company will connect the other two pillars to drive revenue.
Speaking of which, SoundHound generated just $31.1 million in revenue in 2022. But that represented 47% growth from 2021, so it's expanding quickly. And the company had $331.5 million in bookings that are expected to convert to revenue over time. SoundHound's average customer contract length is 6.5 years, which means it's attracting lengthy commitments.
SoundHound stock does carry risk. It's a small cap valued at just $525 million, and the company is losing money hand over fist -- including $115.3 million in 2022. It was running low on cash at the end of the year, but it secured a $100 million financing facility earlier this month from Atlas Credit Partners, with the ability to extend that to $125 million. It matures in 2027 and refinances the company's existing debt, which will free up cash flow and give it some extra breathing room.
Despite SoundHound's incredible progress to date and its impressive customer list, this pick is best suited for investors comfortable sitting on the extreme end of the risk spectrum.
