Artificial intelligence (AI) has swept the market this year following the launch of ChatGPT late last year.
Interest in AI is a big reason why the Nasdaq Composite has jumped this year, up 22% so far. However, tech stocks have pulled back more recently as interest in AI seems to have faded, and investors have realized that the potential transformation will take longer than expected.
Considering that AI has yet to have a meaningful impact on any stock except for Nvidia, AI stocks seem to warrant some skepticism. Keep reading to see two AI stocks that I’d tread lightly with today.
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1. C3.ai
Shares of C3.ai (AI 2.48%) have more than doubled this year, largely on the hype around AI. However, C3.ai’s AI results have yet to show any significant impact from the spike in interest in AI.
Revenue in its most recent quarter grew just 11%, and the company forecast growth at a modest 15% for the current fiscal year.
Meanwhile, C3.ai is posting wide losses and spending much of its revenue on stock-based compensation. Management also stepped back from a goal of generating an adjusted operating profit by the end of the current fiscal year.
C3.ai, which makes AI enterprise applications for purposes like demand forecasting and supply chain management, is unique among AI stocks due to its focus on enterprise software, and the company says it doesn’t know of any direct competitor in the space. However, that could change over time, and big cloud companies like Microsoft or Amazon could challenge C3.ai if the market is big enough.
Finally, C3.ai’s price-to-sales ratio seems unsustainable at 10. Unless its growth rate significantly accelerates or the company reaches profitability, the stock seems likely to drift lower from here.
2. Tesla
Tesla (TSLA 1.33%) isn’t a pure-play AI stock. The company is best known for its electric vehicles, but some investors see artificial intelligence as the real reason to invest in the stock.
According to Ark Invest’s Cathie Wood, for example, Tesla shares could jump roughly 1,000% by 2030, and she sees it as the leader in the emerging robotaxi industry, which she believes will represent a $9 trillion market by 2030.
Tesla CEO Elon Musk spent much of the recent earnings call talking up the company’s potential in AI with its Optimus robot and its full self-driving technology, which is now in beta. Additionally, Musk has said that Tesla would manufacture its own robotaxi vehicles, designed to be driverless, though there is no timeline for its production.
Similarly, it’s unclear when full self-driving might become available to Tesla owners, but the consistent price decreases this year seem to indicate that FSD isn’t around the corner as the release could significantly raise the value of Teslas, especially if Musk’s vision of Tesla’s AV ride-sharing marketplace comes true.
Beyond AI, Tesla is also seeing demand for its vehicles slow, like much of the electric vehicle industry, and Musk spent much of the last earnings call complaining about high interest rates and production challenges with the Cybertruck.
Tesla stock is priced for perfection right now at a price-to-earnings ratio of around 70, but most things seemed to go wrong for the company in the recent quarterly report. Revenue grew just 9%, and automotive revenue was only up 5%, while profits tumbled from a year ago, with its operating margin down by more than half.
Considering the weakening demand for EVs and ongoing price cuts, it’s likely that those margins could continue to shrink.
Tesla’s valuation seems to assume that its AI strategy will pay off handsomely, but there’s no evidence of that yet, making it mostly a leap of faith on the part of investors. Until the stock is no longer so expensive, or the company proves that its AI technology is truly transformative, Tesla stock is best avoided, given its valuation and the weakness in the EV market.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Microsoft, Nvidia, and Tesla. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
