C3.ai (AI 3.02%) and Adobe (ADBE 0.87%) represent two very different ways to invest in the growing artificial intelligence (AI) market. C3 develops AI algorithms that can be directly plugged into a company's existing software infrastructure to accelerate, automate, and optimize certain tasks. Adobe mainly provides cloud-based software for media professionals and enterprise customers, but it's been upgrading those services with generative AI tools for creating fresh digital media content and accelerating its digital workflows.
Both stocks have attracted a lot of attention during the recent buying frenzy in AI stocks. Over the past 12 months, C3's stock rallied nearly 130% as Adobe's stock gained 85%. But should investors buy either of these high-flying stocks right now?
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C3 still has a lot to prove
C3's stock might have rallied over the past year, but it remains more than 30% below its IPO price from December 2020. C3 initially dazzled the bulls with its catchy ticker symbol, its rapid growth, and the fact that it was founded and led by Tom Siebel -- an industry veteran who sold his previous company Siebel Systems to Oracle for $5.9 billion.
However, C3's stock lost its luster as three big problems surfaced.
First, it still generates more than 30% of its revenue from a joint venture with the energy giant Baker Hughes (BKR -1.38%). Baker has been negotiating lower minimum payments to that joint venture, and there's no guarantee it will renew that deal when it expires in fiscal 2025.
Second, C3's growth cooled as the macro and competitive headwinds intensified. Its revenue grew 38% in fiscal 2022 (which ended in April 2022) but rose just 6% in fiscal 2203. The company expects its revenue to rise between 11% and 20% in fiscal 2023 as the macro environment improves and it rolls out new generative AI tools. But it still faces intense competition from tech giants like Amazon and Microsoft as they directly integrate more AI tools into their cloud-based platforms.
Lastly, C3 recently ditched its goal of achieving profitability on a non-GAAP (adjusted) basis in fiscal 2024. Instead of responsibly cutting costs as its growth slows, C3 plans to ramp up research and development (R&D) spending to develop new algorithms for the growing generative AI market. That's ironic since generative AI platforms like ChatGPT could eventually curb the market's appetite for C3's own AI algorithms.
With an enterprise value of $2.7 billion, C3 still isn't a screaming bargain at 9 times this year's sales. It if can't overcome its customer concentration, macro, and competitive headwinds soon, its valuations could deflate and its stock could crumble.
Adobe's valuations are getting frothy
Adobe's revenue rose 15% on a constant currency basis in fiscal 2022 (which ended last December), and it expects 13% growth on the same basis in fiscal 2023. Like many other cloud-based software companies, Adobe experienced a mild slowdown as the macro headwinds made it tougher to gain new customers and secure longer contracts.
As Adobe navigated those headwinds, it reined in its spending and repurchased more shares to boost its earnings per share (EPS). As a result, the company expects adjusted EPS to rise 16% in fiscal 2023 and accelerate from its 10% growth in fiscal 2022. Unlike many other tech companies, Adobe didn't execute mass layoffs to boost its margins.
Adobe's growth rates seem rock-solid, but the market's excitement regarding the growth potential of its Firefly AI tools keeps driving its stock to new 52-week highs. That bullish trend is troubling because its stock is getting pricey at 34 times forward earnings and 14 times next year's sales. There's also no clear evidence that Firefly's AI upgrades for its Digital Media and Digital Experience platforms will boost near-term revenue growth.
Another issue is Adobe's pending acquisition of Figma for $20 billion. That takeover would enable Adobe to eliminate its closest competitor in the software user interface (UI) and user experience (UX) markets, but it's still being deeply scrutinized by antitrust regulators. If that deal gets derailed, Adobe will need to pay a $1 billion termination fee.
Adobe is still a promising long-term investment, but an unexpected slowdown in the AI market or the collapse of the Figma deal could pop its bubbly valuations. But unlike C3, Adobe is firmly profitable and doesn't have any customer concentration problems.
The better buy: Adobe
I wouldn't rush to buy either of these stocks right now. But if I had to choose one, I'd pick Adobe because it's clearly the more stable business. C3 still hasn't proven its business is sustainable, it's still deeply unprofitable, and the upcoming expiration of its joint venture with Baker Hughes casts a dark cloud over its future.
