In the wake of the worst stock market downturn in over a decade, things are starting to look up. Each of the major market indexes has recovered at least 20% from their recent bottoms, causing some investors to announce the arrival of the next bull market -- at least by that measure.
Helping fuel the recovery are recent advances in the field of artificial intelligence (AI) and the vast promise it provides, though estimates vary wildly. Cathie Wood's Ark Investment Management estimates that AI software could represent a $14 trillion revenue opportunity by 2030. More conservative prognostications from Morgan Stanley and Goldman Sachs peg the opportunity at $6 trillion and $7 trillion, respectively, by the end of the decade.
This vast opportunity has investors scrambling to buy stocks best positioned to profit from the coming AI boom, and while some of these stocks have a long way to run, others raise far more questions than answers.
Image source: Getty Images.
Nvidia: Helping kick off the AI boom
Nvidia (NVDA 6.18%) came to prominence by pioneering the graphics processing units (GPUs) that rendered lifelike images in video games. In recent years, however, the company's processors were reconfigured to speed data around the ether, making them a staple in data centers and cloud computing. That also made them the perfect choice for running AI systems, a use case Nvidia has been leaning into.
For its fiscal 2024 first-quarter results in May, revenue of $7.2 billion grew 19% year over year, while earnings per share (EPS) of $0.82 climbed 28%. But it was the company's guidance that raised eyebrows on Wall Street. For Q2, management forecasted revenue of roughly $11 billion, which would not only be an all-time high for the company, but also represent growth of 64% year over year and 53% sequentially. CFO Colette Kress was clear that the results were "led by growing demand for generative AI and large language models." The growing excitement has driven Nvidia stock up 220% so far this year.
While other semiconductors can run AI systems, Nvidia is the gold standard. Furthermore, the company continues to push the boundaries of performance, spending more than $1.8 billion on research and development -- totaling 26% of its total revenue -- to create the next generation of cutting-edge AI processors.
The company also benefits as data centers and cloud-computing operators beef up their existing systems with the latest and greatest Nvidia semiconductors to ensure they have the computational horsepower necessary to keep up with the accelerating demand for AI.
There's no such thing as a "sure thing" in investing, but the way things stand right now, Nvidia is as close as it gets.
C3.ai: In name only
Given the mad dash to capitalize on the coming AI boom, it seems only natural that investors would gravitate toward C3.ai (AI 3.02%). After all, the company software-as-a-service (SaaS) offerings include more than "40 turnkey enterprise AI applications that meet the business-critical needs of global enterprises" across a wide range of industries. The AI gold rush has fueled a stunning rise for C3.ai stock, with its shares soaring 270% year to date. On the surface, it seems like a no-brainer. But dig a little deeper, and it's easy to see why I wouldn't touch this stock with a 10-foot pole.
A quick review of C3.ai's recent financial results paints the picture of a company in trouble. For its fiscal 2023 Q4 (ended April 30), C3.ai delivered revenue of $72.4 million, which was flat year over year, resulting in a loss per share of $0.58, which worsened by 5%. These results came in the midst of accelerating demand for AI systems, which suggests that C3 hasn't been able to capitalize on the boom.
Perhaps even more concerning is the company's outlook. For the coming quarter, C3.ai is guiding for revenue growth of just 9% year over year and 15% for the full year, all while its operating losses continue to mount. This serves to reinforce my concerns. If that's the best the company can hope for at the start of the AI boom, that doesn't bode well for C3.ai's future.
Full disclosure
I'd be remiss if I didn't address the elephant in the room: Both stocks are trading at nosebleed valuations, with plenty of growth already baked into their respective stock prices. Nvidia and C3.ai are currently selling for 21 times and 13 times next year's sales, respectively.
While C3.ai is technically the "cheaper" of the two, I still wouldn't buy it. Given the company's seeming inability to capitalize on the AI gold rush -- its stated area of expertise -- and its mounting losses, I simply have no interest in this AI stock.
On the other hand, Nvidia's management has been particularly adept at pivoting the company to profit from the changing technology landscape, capturing large parts of the data-center, cloud-computing, and AI markets. Its place as the gold standard for processing AI makes Nvidia the AI stock to buy hand over fist.
