Should You Forget C3.ai and Buy These 2 AI Stocks Instead?

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C3.ai (NYSE: AI) went public at $42 on Dec. 9, 2020, started trading at $100, and soared to an all-time high of $177.47 just two weeks later. Investors were initially impressed by its enterprise AI algorithms — which could be plugged into a large organization’s existing software to automate and accelerate certain tasks — and its rapid growth rates. Its ticker symbol also contributed to its popularity as a meme stock.

But as of Monday, C3.ai’s stock was trading below its IPO price in the $38 to $40 range. The bulls retreated as its growth cooled off, it racked up steep losses, and rising interest rates popped its bubbly valuations. After growing its revenue at a compound annual rate of 40% from its fiscal 2019 to its fiscal 2022, its revenue only rose by 6% in its fiscal 2023 (which ended April 30, 2023) as macro headwinds and pessimism drove many companies to rein in their spending.

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In its fiscal 2024, C3.ai’s revenue rose by 16% as more organizations installed its AI algorithms in their efforts to hop aboard the AI bandwagon, and management expects an acceleration to between 19% and 27% growth in fiscal 2025 as that market expands. Analysts expect its revenue to grow at a compound annual rate of 20% from fiscal 2024 to fiscal 2027.

That sounds promising, but there are three bright red flags for investors.

First, C3.ai generates more than 30% of its revenue through a joint venture with Baker Hughes (NASDAQ: BKR). That deal will expire by the end of fiscal 2025, and it hasn’t been renewed yet. Second, it expects to remain unprofitable as it develops more generative AI tools. Lastly, C3.ai has gone through three CFOs since its IPO. As it rotated through those executives, it repeatedly changed its formula for counting its customers and cannibalized its own subscription services with consumption-based plans.

Given these challenges, C3.ai’s stock doesn’t seem like a bargain at 10 times this year’s sales. So instead of investing in that wobbly business, investors should consider buying two cheaper AI-driven stocks: Micron (NASDAQ: MU) and IBM (NYSE: IBM).

Micron manufactures DRAM and NAND memory chips. It’s not the biggest player in either market, but it produces denser chips than most of its larger competitors. Those memory chips can’t process AI tasks on their own, 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 in solid-state drives (SSDs).

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