Two AI-focused companies currently experiencing growth trends.
In the opening months of 2023, numerous artificial intelligence (AI) shares experienced a surge, only to dip during the summer. This dip was a consequence of ChatGPT's excitement being tempered by the government's inflation-controlling measures encountering additional challenges. However, the AI sector was far from finished, as a handful of experts in the field reclaimed control, showcasing impressive business outcomes and upward stock trends as 2023 approached its end.
I'm here to delve into a couple of AI stocks that seemed to lose their luster earlier in the year, but have found a new lease of life recently. Are these stocks setting the stage for 2024, or are they due for another price correction?
I don't have an answer yet, but let's examine. Two AI-focused companies, C3.ai (AI 6.09%) and SoundHound AI (SOUN 2.28%), experienced substantial stock price increases in November. What lies ahead for them?
C3's November surge: 26%
The brainchild of Tom Siebel, a renowned figure from Siebel Systems, can be a contentious topic.
The stock has seen a 26% increase in November and a staggering 173% year-to-date, but it's not all smooth sailing. C3 is still trading 75% lower since its debut on the public market nearly three years ago. Despite this, it still appears pricy in various respects. The company is yet to turn a profit in a significant way, making most valuation ratios irrelevant. And when it comes to the commonly-used price-to-sales ratio, it's a lofty figure at 13 times C3's trailing revenue.
This stock can be frustrating, based on numbers, but it does have a compelling narrative. C3's strength lies in optimizing business operations with the help of advanced machine learning algorithms. At its best, the company's products help businesses achieve superior results with tailor-made AI analytics for their specific industry, or a particular business process, based on real-world data generated by the company's everyday operations.
AI-driven business operation optimization is a thriving niche with numerous competitors, but few can match C3's deep expertise and strong foundation in business process insights. Notably, CEO and co-founder Tom Siebel also founded Siebel Systems, which is now a prominent customer relationship management (CRM) platform provided by business software giant Oracle. Siebel founded C3 four years after Oracle's $5.8 billion buyout offer for Siebel Systems, leveraging lessons learned from a successful CRM platform in another form of computer science.
Some investors are concerned about C3's modest sales growth during a global AI boom. However, it's worth noting that business-to-business services often react more slowly than consumer-facing platforms when market trends shift. These AI systems must be tested by potential clients, earn a portion of the customer's technology budget, and more. This process takes time. As a result, C3 is investing more than its quarterly gross profit into sales and marketing -- and even more into research and development (R&D).
This company isn't resting on its laurels, but pushing the growth-oriented pedal to the metal with both feet. That's why C3 incurs losses, and management expects to continue this strategy for the foreseeable future.
In essence, C3.ai isn't everyone's cup of tea due to its lack of current profits. Optimistic investors disregard this concern to focus on the company's relentless pursuit of long-term growth.
It's challenging to determine whether C3's stock deserves a higher price based on its current performance. Investors face a high-risk, high-reward situation that could result in substantial losses or create an industry leader. The only certainty here is that C3's stock will be volatile in 2024 and beyond. Jumping on the C3 bandwagon could be advantageous, but you should be prepared for substantial losses if the growth-oriented business plan doesn't work out in the long run. Proceed with caution.
SoundHound's November surge: 48%
If you thought C3 was volatile, you haven't seen anything yet. SoundHound has soared 48% higher this month but remains 85% below its all-time highs from May 2022.
On the positive side, this recent gain was a result of encouraging business results. SoundHound's third-quarter results -- reported three weeks ago -- surpassed Wall Street's consensus estimates significantly. SoundHound's voice control and conversational customer service solutions are gaining traction, with notable companies such as White Castle and Krispy Kreme joining SoundHound's clientele in recent months.
Whether you're aware of it or not, you may have interacted with SoundHound's voice control systems in your car, at a drive-thru window, or in one of those automated menu systems over the phone. SoundHound's Houndify platform employs machine learning to interpret commands and generative AI to craft a conversational response.
Like C3, SoundHound can seem cheap or expensive depending on your expectations. The company is yet to turn a profit. Its quarterly sales are inconsistent and difficult to predict (a significant contract won or lost can affect SoundHound's income statement). Traditional value investors shy away from stocks like these, and SoundHound is too unpredictable for many growth seekers, too.
The company's shares are currently priced modestly at 2.3 times its trailing income, and this income is expanding rapidly. If we smooth out the sales curve, SoundHound's revenue for the last four quarters amounted to $38.2 million. A year ago, the same revenue figure was $26.8 million, representing a 43% year-on-year increase. Frequently, such rapid growth leads to higher price-to-sales ratios, but SoundHound's share price is still low compared to, for example, C3's 13 times trailing sales.
I find SoundHound's strategy appealing, and its share price appears to be undervalued given its sales growth. If you handle C3's expensive stock like nitroglycerin, you could view SoundHound as a can of gasoline. It's unpredictable and carries a degree of risk, but it's safer to handle than actual dynamite.
Caution is still advisable with this stock, but considering its risk-reward balance, one might consider investing a slightly larger amount. SoundHound's risk-reward ratio is less intimidating than C3's.
In the realm of investing, many financial analysts are keeping a close eye on the two AI-focused companies, C3.ai and SoundHound AI, which experienced significant stock price increases in November. For instance, C3.ai saw a 26% surge, and SoundHound soared by 48%.
Given the current financial landscape, some investors are looking for opportunities to diversify their portfolios by investing in high-growth tech stocks like these. However, it's important to remember that investing in AI companies, like C3.ai and SoundHound AI, can be risky due to their dependence on technological innovation and market trends.
