The recent tumult in the artificial intelligence (AI) sector raises eyebrows among investors – beguiling, perplexing even. The cooling off of prominent AI stocks like Nvidia has prompted concern, and yet, amidst the uncertainty, the underlying AI revolution persists, ensuring fertile ground for discerning stock pickers seeking resilient opportunities.
Amidst this landscape, a panel of Motley Fool contributors has singled out two AI stocks with promising prospects for investors, while cautioning against the allure of one.
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The Sheltered Harbor of Microsoft Stock for AI Investors
Jake Lerch (Microsoft): Amid the turbulence, opting for simplicity may prove sagacious. Thus, my favored AI investment currently rests with Microsoft (NASDAQ: MSFT).
Microsoft’s stock may not dazzle if the AI momentum intensifies, yet its allure resides in its steadfastness – a comfort in volatile times. The company’s diversified revenue streams spanning gaming, enterprise software, cloud services, and advertising, coupled with its foray into AI innovation, position it as a stalwart investment choice.
In the last quarter (ended March 31, 2024), Microsoft’s revenue scaled to $61.9 billion, a 17% surge from the preceding year, with a notable $8.4 billion allocated to shareholders via dividends and buybacks.
This affords Microsoft investors a cushion against market volatility, a luxury not bestowed upon all AI stocks. Hence, amidst the AI upheaval, Microsoft stands resilient as a prudent investment choice.
Amazon’s Ascendancy: A Bargain Beckons
Justin Pope (Amazon): Amazon (NASDAQ: AMZN), an enticing prospect in the AI realm today, assumes an indisputable mantle. Leading the charge in cloud services via AWS, Amazon integrates AI functionalities into its platform, cementing its status as a cornerstone for AI model development and execution.
The recently concluded Q1 spells out a success story for Amazon, with a remarkable 82% surge in operating cash over the past year, eclipsing $99 billion. While gauging the stock based on earnings or free cash flow poses challenges due to Amazon’s reinvestment strategy, this operational cash flow metric unveils Amazon’s underlying worth.
Witnessing a marked surge in stock value and omnipresent vigor across its e-commerce, cloud, and advertising segments, Amazon epitomizes a diverse powerhouse, impervious to sectoral vicissitudes. With ample room for future growth, Amazon embarks on a trajectory beaming with long-term promise for investors.
The Divergent Fortunes of C3.ai
Will Healy (C3.ai): C3.ai (NYSE: AI), though seemingly appealing at first glance, conceals underlying pitfalls that merit caution. Specializing in AI-enhanced enterprise software, C3.ai positions itself alongside soaring AI peers.
However, a closer inspection unveils critical issues. Notably, its price-to-sales (P/S) ratio, though moderate, flags concerns amidst a market awash with lofty valuations.
It’s discernible that beneath the veil of AI allure, C3.ai’s investment veneer may not withstand rigorous scrutiny, warranting prudence among potential investors.
Analysis of C3.ai’s Fiscal 2024 Challenges and Investor Risk
C3.ai’s Reliance on Baker Hughes for Revenue
C3.ai is facing a critical juncture in its fiscal 2024 operations, with oilfield services giant Baker Hughes generating just over 35% of its revenue. However, this dependence on a single contract with Baker Hughes signifies a precarious situation. As the current contract nears expiration in April 2025, C3.ai risks losing a significant portion of its revenue unless a new agreement is secured.
Financial Struggles and Uncertainty
Despite its partnership with Baker Hughes, C3.ai is grappling with financial challenges. In the first nine months of fiscal 2024, the company recorded $224 million in revenue, reflecting a modest 15% increase compared to the previous year. This growth rate pales in comparison to several other AI stocks experiencing much more rapid revenue expansion.
Additionally, C3.ai’s operating expenses for the same period stood at $363 million, surpassing its revenue by nearly 1.5 times. Consequently, the company incurred a net loss of $207 million during this timeframe, further exacerbating its financial woes.
Lingering Investor Concerns
While C3.ai currently holds approximately $723 million in liquidity, providing a temporary buffer, doubts persist regarding the company’s path to profitability. The uncertainty surrounding its financial sustainability, coupled with the potential revenue loss from the Baker Hughes contract, has contributed to a decline in C3.ai’s stock value, eroding most of its gains over the past year.
Investment Considerations in the AI Sector
Given the tenuous nature of C3.ai’s financial position and its reliance on a single revenue source, investors may find it prudent to explore alternative opportunities within the AI market. Diversifying investments among various AI stocks with stronger growth trajectories could mitigate risks associated with C3.ai’s uncertain future.
