C3.ai(NYSE:AI) went public on December 9, 2020 at $42, started trading at $100 and rose to an all-time high of $177.47 just two weeks later. Investors were initially impressed by enterprise AI algorithms – which could plug into a large organization’s existing software to automate and speed up certain tasks – and their rapid growth rates. The ticker symbol also contributed to its popularity as a meme stock.
But as of Monday, C3.ai stock was trading below its IPO price, between $38 and $40. The bulls retreated as growth cooled, steep losses were incurred and rising yields sent buzzing valuations tumbling. After growing at a compound annual rate of 40% between fiscal 2019 and fiscal 2022, revenues rose only 6% in fiscal 2023 (ending April 30, 2023) as macroeconomic headwinds and pessimism prevailed pushing companies to rein in their activities. in their spending.
Start your morning smarter! Wake up with Breakfast news in your inbox every market day. Register for free »
Image source: Getty Images.
In fiscal 2024, C3.ai’s revenues grew 16% as more organizations installed their AI algorithms in their efforts to jump aboard the AI bandwagon, and management expects an acceleration to between 19% and 27% % growth in fiscal year 2025 as that market grows. . Analysts expect revenue to grow 20% annually between fiscal 2024 and fiscal 2027.
That sounds promising, but there are three bright red flags for investors.
First, C3.ai generates over 30% of its revenue through a joint venture with Baker Hughes(NASDAQ: BKR). That deal expires at the end of 2025 and has not yet been extended. Second, the company expects to remain unprofitable as it develops more generative AI tools. Finally, C3.ai has had three CFOs since its IPO. As the company rotated between these executives, it repeatedly changed the formula for counting its customers and cannibalized its own subscription services with consumption-based plans.
Given these challenges, C3.ai stock doesn’t seem like a bargain with revenues of 10 times this year’s sales. So instead of investing in that shaky company, investors should consider buying two cheaper AI-powered stocks: Micron(NASDAQ:MU) And IBM(NYSE: IBM).
Micron produces DRAM and NAND memory chips. It is not the largest player in either market, but produces chips with greater density than most of its larger competitors. These memory chips cannot process AI tasks independently, but the memory they provide is essential for supporting demanding AI applications. Higher-density DRAM chips allow data centers to store more short-term data, while higher-capacity NAND chips are used to store more long-term data on solid-state drives (SSDs).
Micron’s business generally moves back and forth with the cyclical memory market. In fiscal 2023 (which ended in August 2023), its revenues fell 49% and it posted an adjusted net loss. That slowdown was caused by the cooling PC market, the end of the 5G upgrade cycle in the smartphone market, and the prioritization of AI-oriented GPUs over other types of chips in the data center market.
But in fiscal 2024, Micron’s revenue rose 62% as the company returned to profitability. That recovery was supported by stabilizing PC and smartphone markets, as well as data center operators purchasing more high-capacity SSDs and high-bandwith memory (HBM) chips to support AI applications.
Analysts expect Micron’s revenue and adjusted earnings per share to grow 52% and 587%, respectively, in fiscal 2025 as that cycle continues. Those would be incredible growth rates for a stock trading at twelve times forward earnings. This growth phase won’t last forever, but the stock could still have a lot of upside potential.
IBM is often seen as a slow-growing technology giant rather than an exciting AI play. From 2012 to 2020, annual revenues fell from $107 billion to $55 billion as the company divested some of its major businesses and suffered sluggish growth in its legacy enterprise hardware, software and IT services divisions; and failed to keep pace with its peers in the expanding cloud infrastructure and services markets.
But from 2020 to 2023, IBM’s revenue and earnings per share grew at compound annual rates of 4% and 9%, respectively. That recovery was driven by two key tailwinds. First, it has moved its slower-growing managed IT infrastructure services business into a new company, Fire extinguisher (NYSE:KD).
Second, it focused on expanding the presence of Red Hat – its open source software subsidiary – in the hybrid cloud and AI markets. Instead of taking on such cloud giants Amazon And MicrosoftIBM developed more open-source AI tools to handle the data flowing between public cloud platforms and on-site private clouds. These “hybrid” cloud deployments were popular with large companies that were not ready or willing to migrate all their data from on-premises servers to cloud-based platforms.
Analysts expect IBM’s revenue and earnings per share to grow 4% and 5% annually, respectively, between 2023 and 2026. The stock is fairly valued at 21 times forward earnings, its dividend offers a decent 3% yield at the current share price, and it could outperform flashier AI stocks like C3.ai over the long term.
Consider the following before purchasing shares in Micron Technology:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Micron Technology wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $829,378!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. TheStock Advisoris on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns November 25, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool holds positions in and recommends Amazon, Kyndryl, and Microsoft. The Motley Fool recommends C3.ai and International Business Machines and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Should you forget about C3.ai and buy these two AI stocks instead? was originally published by The Motley Fool
Sign Up For Daily Newsletter
Be keep up! Get the latest breaking news delivered straight to your inbox.
By signing up, you agree to our Terms of Use and acknowledge the data practices in our Privacy Policy. You may unsubscribe at any time.
