Hot stocks often allure with promises of quick returns and exciting growth prospects. This allure has never been stronger than in the current era of Artificial Intelligence, where the potential for transformative change has driven many investors to look towards AI-related companies as the next big thing.
C3.ai, for example, comes up regularly as a “top AI stock to buy.” However, amid the glitz and glamor of skyrocketing stock prices and revolutionary technology, it is crucial for investors to approach with caution.
A quick look at C3.ai
So let’s take a closer look at C3.ai Inc (NYSE:AI) stock, which lost 25 % in a few days last week.
Some analysts also do not recommend the stock. That is the case of Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC) Securities.
Therefore, we ought to be cautious (and this goes for all “hot” AI stocks) about investing in C3.ai, an artificial intelligence (AI) company that provides an AI application-development platform and suite of AI applications to large enterprises. Despite the general hype surrounding AI technology, C3.ai's financial performance has been unimpressive.
Here are the key points from a great article from Timothy Green which tells you why.
- Flatlining Revenue and Significant Losses: C3.ai's stock surged earlier in the year, but not due to the company's financial performance. The company is transitioning from a subscription-based model to a consumption-based model, which has resulted in flat revenue and substantial losses. The company's business model, which involves selling to large enterprises, requires long sales cycles and substantial spending on sales and marketing.
- Disappointing Earnings Report: In a recent earnings report for the fiscal fourth quarter, the company's revenue remained unchanged from the prior-year period, net loss worsened, and guidance indicated a sequential revenue decline in the first quarter of fiscal 2024. Despite an increase in interest in AI in business processes, the company expects sluggish revenue growth in fiscal 2024, with a guided full-year revenue of $295 million to $320 million, representing growth of about 15% at the midpoint.
- Shift in Interest and Competitive Landscape: Interest is shifting away from C3.ai's AI development platform towards its suite of AI applications, which includes enterprise software products for various functions. However, many software companies are finding ways to integrate AI into their own products, increasing competition for C3.ai.
- High Sales and Marketing Costs: The company spent $51.7 million on sales and marketing in Q4, which consumed all its gross profit and more than 70% of its total revenue. The company is seeing sales cycles shorten and increased interest due to its six-month pilot program, but this comes at a high cost.
- Comparatively Simple Competitors: The article contrasts C3.ai with NVIDIA, a company with a simpler story. NVIDIA designs powerful chips that are used to train and run advanced AI models, a clear and straightforward value proposition.
- Overvalued Stock: The company was valued at $4.5 billion before a significant drop in stock price, a premium valuation that the article suggests the company doesn't appear to deserve given its current performance and growth projections.
In summary, while C3.ai may eventually succeed in the long term, the article suggests that it doesn't seem to be a compelling investment at the moment due to a combination of flatlining revenue, significant losses, high sales and marketing costs, and a complex and competitive product landscape.
Usual Suspects
Truth is, when you search around the web, most of the top 10 “AI” stocks lists will include Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), IBM (NYSE:IBM), Micron (NASDAQ:MU), Nvidia (NASDAQ:NVDA), Baidu (NASDAQ:BIDU), Adobe (NASDAQ:ADBE), IBM, Oracle (NYSE:ORCL), Palantir… And most of them are included in the Nasdaq-100 index. These are established, reputable companies with a proven track record of success and strong positions in their respective industries.
So why bother taking the risk on “hot AI stocks”? Returns?... Don’t worry, you can have juicy returns with the “big ones” too.
The attraction of hot AI stocks often lies in their potential for high returns. These are typically smaller, less established companies that have the potential for explosive growth. However, with this potential for high returns comes increased risk. These companies may not have a proven track record, their business models might be untested, and their financials may not be as strong or stable.
On the other hand, the 'big ones' like Alphabet or Microsoft, despite being large and more stable, have also shown the ability to generate substantial returns. These companies have been consistently investing in and developing AI technology, often leading the way with innovative solutions. As a result, they've been able to sustain growth and profitability, which in turn drives shareholder value.
Moreover, these larger companies offer diversification that smaller, niche AI stocks can't. They have varied business operations spanning different sectors and geographic regions, which helps to spread risk. For example, Amazon is not only a retail giant but also leads in cloud computing services with Amazon Web Services, and has a presence in digital advertising and entertainment sectors. Similarly, Alphabet is not only about its flagship search engine, Google, but also includes YouTube, Google Cloud, and various other ventures.
Thus, you don't necessarily need to seek out hype AI stocks to reap attractive returns in the AI space. By investing in the larger, more established companies that are included in the NASDAQ-100, you can potentially achieve substantial returns while mitigating some of the risks associated with investing in smaller, less established companies.
ETF Alternative
An alternative to individual AI stock picking for those who are determined to focus specifically on the AI sector, is investing in AI-related exchange-traded funds (ETFs). These funds provide an easy way to gain exposure to a diverse range of companies involved in the development and utilization of AI technologies without having to pick and choose individual stocks.
AI-related ETFs might include stocks from a broad range of companies that are contributing to and benefiting from the growth in AI. This can include not only the AI specialists but also hardware companies producing the infrastructure needed for AI, software companies creating AI applications, and even non-tech companies that are heavy users of AI in their operations.
So if you're keen to invest specifically in AI but want to avoid the risk of picking individual stocks, AI-related ETFs can be a great choice. They allow you to benefit from the growth of the entire sector, rather than pinning your hopes on the success of a single company.
Here are some of the Artificial Intelligence ETFs:
- Global X Robotics & Artificial Intelligence ETF (BOTZ)
- Global X Artificial Intelligence & Technology ETF (AIQ)
- ROBO Global Robotics and Automation Index ETF (ROBO)
- iShares Robotics and Artificial Intelligence ETF (IRBO)
- iShares Exponential Technologies ETF (XT)
- First Trust Nasdaq Artificial Intelligence ETF (ROBT)
The list goes on…
However, beware of the Holdings of these ETFs: many will already include the “big ones” (Meta, Tesla (NASDAQ:TSLA), Microsoft, Amazon…). Be sure to check them before investing blindly in them. If you are looking for exposure to more specialized AI companies, some ETFs may not be suited to your investing goals.
To Sum Up
The fascination of hot AI stocks is undeniable, given the rapid advancements in the field and the potential for significant returns. But companies like Microsoft, Amazon, Nvidia, Alphabet, and Tesla, among others, are leading the way in AI development and implementation, showing promising growth prospects. Additional well-known players such as Adobe, Baidu, IBM, Oracle, and Palantir also offer possibilities.
However, investors must approach this sector with caution. AI is a complex and rapidly evolving field, and not all companies that claim to be leveraging AI are doing so in ways that will necessarily translate to long-term financial success. It's essential to understand the company's business model, the practical applications of its AI technology, and the competitiveness of its offerings. Be mindful of hype and overly optimistic projections.
Furthermore, individual stocks carry their own set of risks. Diversification, achieved through holding a variety of stocks or investing in ETFs, can help mitigate these risks. Unfortunately, finding AI-specific ETFs can be challenging and requires diligent research.
Finally, investors should not let the shimmer of AI blind them to fundamental investing principles. Always consider a company's broader market position, financial health, and growth prospects outside of AI. In the rapidly evolving landscape of AI, today's frontrunners may not necessarily be tomorrow's winners. We’ve witnessed it in 2000. Investing in AI stocks, like all investment decisions, should be made with careful consideration, research, and an understanding of one's risk tolerance.
So what do you reckon: buy specific AI pure-player stocks? Buy AI ETFs? Or go with the usual suspects?
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This is an excerpt from an original blog post.