The artificial intelligence (AI) boom has taken the stock market by storm this year. Even as interest in the new technology seems to have faded in recent months, it's a major reason why the Nasdaq Composite has been a big winner this year, up 24% year to date. Most stocks with exposure to AI have soared as well.
However, not every AI stock has what it takes to thrive over the long haul. As with any new technology, there are bound to be winners and losers in artificial intelligence, and you only have to look back at the dot-com bust to be reminded of how the losers can greatly outnumber the winners in a tech cycle.
Let's take a look at two stocks with a lot to prove before I'd buy them or recommend anyone else should.
Image source: Getty Images.
1. C3.ai
C3.ai (AI +1.17%) has been one of the poster children of the AI boom, with shares up 120% year to date even as they've come down substantially from their peak earlier in the year.
On the surface, it's easy to see why the stock has caught fire this year on interest in AI. The company's ticker is AI, making it readily identifiable with the technology, and C3.ai bills itself as the AI for the enterprise company.
C3.ai is a software-as-a-service (SaaS) business that makes AI applications for things like demand forecasting and supply chain management. It also offers an AI platform. While the company's technology might sound impressive, its results don't indicate it's seeing much demand from the AI boom.
NYSE: AI
Key Data Points
In its most recent quarter, revenue grew just 11% to $72.4 million, and the company reported a net loss of $64.4 million, showing it lost nearly a dollar for every dollar it brought in in revenue. Management also stepped back from a goal of turning an adjusted operating profit by the end of the current fiscal year, as it said it needed to invest to capitalize on the opportunity in AI.
At this point, there's little evidence that C3.ai is concretely benefiting from the boom in artificial intelligence. Its guidance calls for just mid-teens revenue growth this year. If it can't take full advantage of the current opportunity, it seems unlikely to be able to grow the business significantly down the road as well. Currently, the stock trades at a price-to-sales ratio of around 10, a valuation normally reserved for stocks that are growing much faster and are more profitable.
2. Soundhound AI
Soundhound AI (SOUN +5.12%) is an AI-based voice and audio specialist. Its main business is its Houndify AI platform, which helps brands build voice assistants, natural language processing, automatic speech recognition, and other such tools.
Like C3.ai, Soundhound has seen its stock jump. It's one of a handful of names seen as a pure play in AI though it's since given up those gains. Unlike C3.ai, Soundhound is experiencing strong growth, but the company is still tiny.
Second-quarter revenue, for example, was up 42% but reached just $8.8 million. Meanwhile, its bottom line is improving, but it's still losing money. It reported a net loss of $21.9 million in the quarter and an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $9.9 million.
NASDAQ: SOUN
Key Data Points
Looking ahead, the company expects 2023 revenue of $43 million to $50 million, and for adjusted EBITDA to be positive in the fourth quarter.
That shows Soundhound is making progress. But I think investors should greet it with some skepticism as the company is competing in voice AI against much larger companies, including Amazon, Alphabet, and Apple. At its current size, it's likely too small for big tech companies to compete with, but voice AI is likely to attract competition as it grows.
Additionally, while EBITDA profitability may be in sight, net profits based on generally accepted accounting principles (GAAP) are likely to take years. The company has significant interest expenses from a relatively high $66 million in debt, and share-based compensation makes up a substantial portion of revenue.
Overall, Soundhound AI's growth and technology may look impressive, but the stock faces too many risks at this point to make it worth buying. Investors can find better AI stocks elsewhere.
