The Market Is Rebounding, and These 3 AI Stocks Are Leading the Way. Are They Still Buys?
Artificial intelligence (AI) stocks have been gaining significant attention in the market lately, thanks to the launch of ChatGPT and the potential disruptive power of AI technology across various industries. This surge in interest has propelled the Nasdaq up nearly 40% this year, with stocks that have exposure to AI experiencing remarkable growth.
Nvidia, a semiconductor company, has been closely associated with AI for quite some time. In May, the company’s blowout guidance for its second quarter, projecting $11 billion in revenue, shattered analyst consensus at $6 billion. This boosted investor confidence in Nvidia’s AI chips, leading to a broad rally in tech stocks and a substantial surge in Nvidia’s stock price. Having tripled in value this year, Nvidia is undoubtedly a leader in AI chips. However, its valuation has become stretched in this rally, with a price-to-earnings ratio of 161. Although forward estimates suggest significant earnings growth due to the AI boom, investors should be cautious about the stock’s potential. Nonetheless, short-term momentum and excitement surrounding AI may still drive the stock higher.
C3.ai, a software-as-a-service company, has experienced similar explosive growth this year, tripling its stock price. With its focus on AI-based applications like demand forecasting and inventory management, investors see it as a lucrative opportunity to capitalize on the AI boom. However, unlike Nvidia, C3.ai has little to show in terms of improving fundamentals. In its recent fiscal year, the company reported flat revenue growth and wide losses. Despite CEO Thomas Siebel’s claim of increased interest from customers, C3.ai’s forecasted revenue growth of only 15% this year suggests that hype, rather than solid performance, is driving its gains. Furthermore, the stock is expensive, with a price-to-sales ratio of 16 that is usually associated with companies exhibiting much higher growth rates. This combination of factors makes it advisable for investors to avoid C3.ai for now.
On the other hand, Microsoft, the second most valuable company in the U.S., has emerged as a leading player in the AI space. Through its strategic partnership and $13 billion investment in OpenAI, Microsoft has integrated OpenAI and ChatGPT technology into various products, including Bing and its Office suite. This has positioned the company to challenge Google search and offer AI co-pilots for coders on GitHub. With its shares already up 50% this year, Microsoft may seem expensive, trading at a price-to-earnings ratio of 39 for a company of its size. However, the recent launch of an AI co-pilot subscription plan for its Office software indicates that Microsoft still has ample opportunities to monetize AI technology. This suggests the stock could continue its upward trajectory, especially as demand for cloud computing and enterprise software rebounds from the slowdown experienced last year.
In conclusion, while AI stocks have seen significant gains this year, investors need to carefully evaluate their investment options. Nvidia, with its leading position in AI chips, has a stretched valuation. C3.ai, despite its name and ticker, lacks the improving fundamentals to justify its gains. Microsoft, on the other hand, stands out as an AI leader, showcasing its ability to leverage AI technology across multiple products. Although its stock seems pricey, recent developments and ongoing potential make it an attractive choice for investors.
