Artificial intelligence (AI) holds more promise than any technology in history. It has already proven its ability to complete some tasks in a fraction of the time that humans can, from summarizing lengthy documents to writing computer code in a matter of seconds. Depending which Wall Street forecast you rely upon, it could add anywhere from $7 trillion to $200 trillion to the global economy in the coming decade.
Nvidia (NVDA +2.57%) is the poster child of the AI revolution because its data center chips have been critical to the development, training, and deployment of almost every significant AI model to date. Surging data center revenue has catapulted the company to a market capitalization of almost $1.8 trillion -- and $1 trillion of that value has been added in the past 12 months alone.
There is still scope for upside in Nvidia stock, especially if Wall Street's AI forecasts prove accurate. But I'm going to explain why Oracle (ORCL +0.17%) and C3.ai (AI 3.50%) are better value AI plays right now.
NYSE: ORCL
Key Data Points
1. Oracle: Positioned as a leader in generative AI infrastructure
Oracle was founded in 1977, and its early success came from its database management software. Today, it's one of the largest providers of cloud computing services under its Oracle Cloud Infrastructure (OCI) segment, which operates 66 data centers around the world.
But each of those 66 data centers is now being expanded, and Oracle is building 100 more. Why? Because the company is experiencing such a significant surge in demand for AI infrastructure that it simply can't keep up. CTO Larry Ellison says Oracle's Nvidia graphics processor (GPU) cluster technology is the most advanced in the industry, offering developers the ability to train AI models at twice the speed and half the cost of its competitors.
Oracle's latest data centers are called Gen2 Cloud, and automation is at their core. Ellison says there is no cost difference between managing 10 data centers and 100 data centers (from an operational standpoint), which translates to savings for customers. In fact, Gen2 Cloud has attracted leading generative AI start-ups like Cohere, Adept AI, and even Elon Musk's xAI, and they have already committed to spending billions of dollars on Gen2 capacity.
In the fiscal 2024 second quarter (ended Nov. 30, 2023), the OCI segment delivered $1.6 billion in revenue, a 52% year-over-year increase. That blew away the 5% growth rate of Oracle's business overall. Even though OCI only accounts for 12% of the company's total revenue, Ellison believes it will maintain its 50% growth rate for years to come, so it could soon become the centerpiece of the Oracle story.
Oracle has generated $3.62 in trailing-12-month earnings per share, and based on its current stock price of $116.64, it trades at a price-to-earnings (P/E) ratio of 32.2. That is marginally more expensive than the 31.7 P/E ratio of the Nasdaq-100 Technology Index, but it's substantially cheaper than the 58.5 P/E ratio of Nvidia.
Ironically, one of the things stopping Oracle from completing its new data center projects more quickly is Nvidia, which is suffering from a supply constraint for its popular chips. Once that hurdle is overcome, Oracle could be set for substantial long-term growth from all of that new industry-leading infrastructure.
NYSE: AI
Key Data Points
2. C3.ai: A small-cap stock with explosive potential
C3.ai is valued at just $3.4 billion, so it's tiny compared to Nvidia, but its contribution to AI has been significant. The company was founded in 2009, and it was the first provider of enterprise AI services -- in other words, C3.ai was the first company to develop ready-made, customizable AI applications for businesses, so they could use the technology to supercharge their operations.
Today, C3.ai offers more than 40 applications suitable for organizations in at least 10 different industries. Retailers, for example, can use C3.ai to boost transaction volume and minimize supply chain costs by allowing AI to generate predictive insights based on customer and transaction data. Similarly, banks can use C3.ai as the ultimate fraud-fighting tool -- one customer saw a whopping 200% increase in the number of suspicious activity cases identified after adopting C3.ai, which were previously going unnoticed.
C3.ai had 404 customer engagements during the recent fiscal 2024 second quarter (ended Oct. 31, 2023), which was an 81% year-over-year increase. That growth rate marked an acceleration over the previous two quarters, which highlights how quickly demand for AI software is scaling in the corporate world.
C3.ai is still focusing on growth, so it isn't a profitable company just yet. Its revenue increased by 17% in Q2, the fastest pace in more than a year. C3.ai is transitioning away from a subscription-based revenue model and toward a consumption-based model instead. This will eliminate lengthy contract negotiations and allow customers to sign up more quickly, which is great in the long run.
Management knew the transition would lead to a temporary slowdown in revenue growth, but the worst appears to be over, and a reacceleration is clearly underway.
C3.ai stock soared 156% in 2023, but it's still trading 82% below its all-time high set during the tech frenzy in 2020. Investors assigned an irrational valuation to the company back then, but the steep drop is now an enticing opportunity.
Based on C3.ai's $284.7 million in trailing-12-month revenue and its current market cap of $3.4 billion, its stock trades at a price-to-sales (P/S) ratio of 11.9. That makes it substantially cheaper than Nvidia, which trades at a P/S ratio of 30.1. Nvidia is growing its revenue far more quickly, so its stock deserves to trade at a premium, but it's unlikely that will last forever.
C3.ai's business, however, is on the upswing, and it can be bought at a steep discount to its best-ever level. That might be the better long-term play.
