There's a compelling argument that 2023 will go down in history as the year artificial intelligence (AI) came of age. ChatGPT arrived on the scene late last year, demonstrating the latest advances in AI and fueling public interest. This sent many companies scrambling to jump on the AI bandwagon, while those that were already there got a lift.
As a result, investors saw an opportunity and pounced, determined to profit from the next phase of the AI revolution. They might just be right. The global AI software market could represent a $14 trillion opportunity by 2030, according to Cathie Wood's Ark Investment Management.
In fact, three AI-adjacent stocks have been at the forefront, generating triple-digit gains since the beginning of 2023. Two still represent compelling investing opportunities, while one has yet to prove itself. Let's look at the three biggest AI-fueled winners so far in 2023, to decide which ones are still worth a peek.
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1. C3.ai -- Up 141%
When it comes to AI, having the right stock ticker can attract a lot of attention, and that certainly has been true for C3.ai (AI 1.18%). However, the company's uneven results and small market cap have fueled its above-average volatility. The stock is currently down 85% from its peak following its initial public offering (IPO). But it's been off to the races so far this year, up 134% in 2023.
Investors have been piling into any AI-related stock they can find, but should perhaps take a more cautious approach with C3.ai. It's in the midst of a very public change to its business model. The company went public in late 2020, providing its software-as-a-service (SaaS) applications to the enterprise market, to help businesses rapidly integrate and deploy AI.
However, in a struggling economy, many of C3.ai's potential customers decided its offerings simply weren't mission-critical, and demand dried up. Then the company found itself on the receiving end of a blistering short report that sent the stock reeling. These factors sent C3.ai scrambling to right the ship, forcing management to switch its pricing plan to a volume-based model and defend its actions. While preliminary turnaround results look promising, whether it's enacted a permanent fix remains to be seen.
Review the preliminary financial results for C3.ai's fiscal 2023 fourth quarter (ended April 30), and the challenges ahead become clear. Management said total revenue will be in a range of $72.1 million to $72.4 million, above the company's previous guidance -- but the midpoint of the range is still flat compared to the prior-year quarter. Management also noted that the "overall business environment for enterprise AI is more active than we have seen since the company's inception and seems to be accelerating." Now C3.ai will need to prove that it can take advantage of that opportunity.
It's curious that not only has C3.ai generated the biggest share-price gains among AI stocks, but the stock is also quite pricey -- at 11 times sales -- when viewed through the lens of its lackluster financial results and the company's short public history. That's not to say it won't succeed, but it is risky. Consider owning C3.ai stock only as a small part of a balanced portfolio.
2. Nvidia -- Up 107%
Arguably, if not for the specialized semiconductors developed by Nvidia (NVDA 0.03%), AI wouldn't be enjoying a renaissance today. The company's graphics processing units (GPUs) are the yardstick by which all other processors are measured, and have become a staple in both cloud computing and AI operations -- the gold standard for ushering data around the ether. Word that Nvidia's gaming segment was on the verge of a comeback, combined with anticipation regarding the rapid adoption of AI, has fueled the stock's 107% surge so far this year.
While Nvidia's data center segment -- which includes AI chips -- has continued its relentless growth, its gaming segment felt the brunt of the stagnant economy. Gamers forced to choose between groceries and the latest high-end processor are opting for their shopping carts, which weighed on Nvidia's results.
However, there's light at the end of the tunnel. CEO Jensen Huang recently said that "Gaming is recovering from the post-pandemic downturn, with gamers enthusiastically embracing the new Ada architecture GPUs with AI neural rendering." If that pronouncement turns out to be true, Nvidia's near-term results will get a lift from pent-up demand for its cutting-edge processors.
Furthermore, Nvidia has the most to gain in the current AI gold rush. To quote Mark Twain, "During the gold rush, it's a good time to be in the pick and shovel business." Here, Nvidia is standing at the entrance of the mine selling the picks and shovels.
Like C3.ai, Nvidia stock is certainly not cheap, trading for 28 times sales -- but that's where the similarities end. Nvidia has earned its premium valuation with a history of remarkable growth. Its revenue has increased more than 500% over the past decade, while its earnings per share have soared 1,320%.
Of all the stocks set to profit from AI, Nvidia likely has the most to gain.
3. Meta Platforms -- Up 102%
Investors might be tempted to think of Meta Platforms (META -2.41%) strictly in terms of its social media prowess, and understandably so. More than 3 billion people visit its platforms every day and 3.8 billion drop by monthly, fueling the company's digital advertising business. Yet AI is integrated in everything Meta does, providing targeted advertising and surfacing relevant content for users. That, and the company's race to further embrace AI, have pushed its stock up 102% since the start of 2023.
Unfortunately, a struggling economy is bad for advertising, since cutting ads is an easy way to trim the budget in times of uncertainty. Meta has suffered from this pullback, but recently returned to growth (albeit in the low single digits) after three successive quarters of year-over-year revenue declines.
Historically speaking, adtech stocks tend to recover ahead of the overall economic rebound. To illustrate, industry-leading digital advertiser Alphabet was already up 49% from its low by the time the Great Recession was ruled to have ended in June of 2009. More importantly, the stock doubled over the course of 2009, which suggests that Meta could recover well ahead of the economic rebound.
Given the stock's run-up so far this year, that recovery may be well and truly underway. However, Meta Platforms is still 37% off its high. If the company can return to its historic double-digit growth rate, there are likely greater gains in store. Additionally, the stock is currently selling for just 5 times next year's sales, providing prescient investors with the rare opportunity to pick up shares at a discount.
