Nvidia, Microsoft, and Amazon are stocks investors commonly associate with artificial intelligence (AI). Each company is developing the technology in its own way to take a leadership position in this emerging industry.
Nvidia makes the most powerful graphics processing units (GPUs) for AI workloads in the data center. The company is worth $2.2 trillion, with $1.5 trillion of that value added in the past year alone thanks to surging demand for those chips.
Microsoft invested $10 billion in ChatGPT developer OpenAI last year, and is using the start-up's latest GPT-4 models to weave AI into its entire product portfolio. Applications like Word and Excel now come with an optional AI assistant called Copilot, and developers can access advanced AI models on the Azure cloud platform to build their own applications.
Amazon, on the other hand, is working to dominate the three core layers of AI: The company is designing its own chips, building its own large language models (LLMs), and developing its own AI applications. Furthermore, Amazon is also using AI across its e-commerce platform to drive sales and help advertisers reach more customers.
Image source: Getty Images.
Investors might be overlooking a smaller AI stock
Nvidia, Microsoft, and Amazon are longtime members of the $1 trillion club. They are widely owned by investors directly, as well as indirectly because they are part of the S&P 500 index.
C3.ai (AI 2.08%) isn't nearly as well known, but it was the world's first enterprise AI company when it was founded in 2009. It delivers AI-as-a-service by providing businesses with advanced, turnkey AI applications to accelerate their adoption of the technology.
C3.ai is worth just $3.1 billion as of this writing, but considering AI could add trillions of dollars to the global economy based on Wall Street's early forecasts, this small company might be primed for significant growth over the long term. Here's why investors might want to buy into the C3.ai story right now.
NYSE: AI
Key Data Points
Perfectly positioned for the AI revolution
C3.ai has over 40 ready-made AI applications designed for 10 industries, all of which can be tailored to suit the needs of individual companies. For the financial services industry, C3.ai's anti-money laundering tool helps banks identify three times more suspicious transactions than traditional methods of detection. Similarly, its smart lending application reduces the amount of time it takes to assess and approve a potential borrower by 30%.
Oil and gas companies use the C3.ai reliability suite to monitor thousands of items of equipment to predict potential failures, which reduces costs and prevents environmental disasters.
C3.ai also offers a generative AI tool for enterprises to help them extract maximum value from their data. It's available on leading cloud platforms like Amazon Web Services and Alphabet's Google Cloud, and it allows businesses to plug in an LLM of their choice to tailor it to their specific needs. It can be used as a virtual assistant, or as a powerful analytics tool.
In the recent fiscal 2024 third quarter (ended Jan. 31), C3.ai had 445 customer engagements, which equaled an 80% year-over-year increase. The company sells its applications through its own channels, but it also partners with Amazon Web Services, Microsoft Azure, and Google Cloud to sell them jointly. More than half of the 50 deals C3.ai closed during the quarter were with the support of its partners.
C3.ai's revenue growth is reaccelerating
Nearly two years ago -- at the start of C3.ai's fiscal 2023 -- the company told investors it was changing its revenue model. It wanted to shift away from subscription-based pricing because it involved lengthy negotiations, which meant onboarding customers was a slow process. Now, it operates under a consumption model instead, so customers only pay for what they use, giving them a faster sign-up process and more flexibility.
C3.ai warned investors the transition would lead to a temporary slowdown in revenue growth while it worked with customers to scale their spending under the new model. The chart below shows the drop in the growth rate throughout fiscal 2023.
However, as forecast by management, revenue growth is now reaccelerating. A record-high $78.4 million came through the door in Q3, marking an 18% increase -- the fastest growth in more than a year. According to C3.ai's financial models, it should continue to accelerate going forward.
Why C3.ai stock is a buy now
Investors should be aware that C3.ai isn't yet profitable. The company lost $72.6 million in Q3, although that figure shrank to $15.8 million on a non-GAAP basis, which strips out one-off and non-cash expenses like stock-based compensation. That, coupled with the slowdown in revenue growth, are the main reasons C3.ai stock is trading 83% below its all-time high that was set during the tech frenzy of 2020 (although it was heavily overvalued back then).
C3.ai has over $723 million in cash, equivalents, and short-term investments on its balance sheet, so it can continue to absorb non-GAAP losses of that size for years to come. However, the company will eventually have to prove to investors it can achieve profitability, and the consumption model should help by reducing customer acquisition costs.
With all of that said, C3.ai has an incredible amount of potential. CEO Thomas Siebel compares AI to the dawn of the internet and the smartphone, and Wall Street forecasts suggest the technology could add anywhere between $7 trillion and $200 trillion to the global economy in the coming decade.
C3.ai stock could deliver substantial upside if it captures even a fraction of that value. Plus, its business is on the upswing right now, which means this could be an ideal time to buy C3.ai shares.
Nvidia, Microsoft, and Amazon are all fantastic AI stocks to own, but investors looking to diversify away from those popular names might be glad they chose C3.ai in the long run.
