The major market indexes rebounded from the 2022 market sell-off with double-digit returns in 2023. The tech-centric Nasdaq Composite was the best performer, surging 43% last year. It could be the start of a new bull market, and there's one promising industry that is bound to deliver big gains over the next several years: artificial intelligence (AI).
Historically, the stocks that outperform coming out of a market correction are a great indicator of where you want to look for rewarding investments. It's no surprise that with generative AI taking the world by storm following the launch of OpenAI's ChatGPT in 2022, some of the best performers in 2023 were AI stocks.
Shares of C3.ai (AI 3.02%) soared 156% last year, but the recent dip is the perfect time to review the investment case for this AI stock. Here are three reasons you might want to consider adding a few shares to your portfolio in the new year.
1. C3.ai has a head start on the competition
There are many start-ups competing in the AI industry, but C3.ai doesn't see a direct competitor for what it does. Large enterprise software companies would be potential rivals, but as founder and CEO Thomas Siebel said at a last year's investor day, "If Oracle has a competitive product to us in any segment in which we operate, we're unaware of it."
Palantir Technologies would be the closest comparison, but the two businesses are fundamentally different. Palantir uses AI to build an intelligent operating system around a company's data, whereas C3.ai focuses specifically on AI applications and no-code software for companies to build their own AI tools.
C3.ai provides applications that help businesses optimize operations and make forecasts based on their data. It also offers a generative AI platform that gives contextual answers to user questions.
C3.ai recently signed or expanded agreements with several major organizations, including Nucor and the U.S. Navy. It's also seeing growing interest through partner networks, such as Amazon Web Services, Alphabet's Google Cloud, and Microsoft.
Increasing demand for C3.ai's application suite is a surefire indicator that it is offering something unique in the marketplace, and this could lead to tremendous growth over the next decade.
2. C3.ai enters 2024 with stronger momentum
Research from McKinsey says that generative AI could add trillions to the economy through productivity gains. This is why organizations are interested in using AI in their operations. It spells an enormous addressable market for C3.ai.
It's always a good sign when a company is showing improving growth. Like many software companies, C3.ai saw growth slow in late 2022, but it recovered last year as more businesses started exploring AI solutions.
After posting a 38% increase in revenue in fiscal 2022, C3.ai saw sales slow to a 5.6% uptick in fiscal 2023. However, the company notched a 17% year-over-year growth rate in the quarter ending in October -- on par with Palantir. Analysts see revenue rising 14.7% in fiscal 2024, before improving to 19.8% in fiscal 2025.
Data by YCharts
3. The stock is trading at a more attractive valuation
C3.ai can grow much faster given many companies are delaying AI spending as they decide how to use and install AI applications in the enterprise. This is why the shares' recent pullback could be a great buying opportunity.
The stock is much more attractive on a price-to-sales basis than it was a few years ago. A lower share price combined with higher sales puts the forward price-to-sales ratio at 11, which is fair for a fast-growing software company.
Keep in mind, C3.ai is a mid-cap growth stock with a high risk profile. The business isn't turning a profit, so investors are making a bet on the long-term potential of the company to expand.
That said, the accelerating revenue growth on top of recent customer agreements with major organizations are encouraging signs. The current pullback in the share price could be a timely buying opportunity.
