AUDIO: A “Pure Play” on Artificial Intelligence
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As The Terminator says in the film franchise’s first sequel: “My CPU is a neural-net processor; a learning computer. The more contact I have with humans, the more I learn.”
Austrian accent aside, that line of dialogue in the 1991 movie was prescient. The eerily human-like antics of ChatGPT remind us how science fiction often has a way of becoming science fact.
ChatGPT (Generative Pre-trained Transformer), developed by the firm OpenAI, utilizes artificial intelligence (AI) to interact with people in an almost human manner. Publicity over ChatGPT has given added momentum to the burgeoning field of AI. Below, I spotlight an investment opportunity that’s a rare “pure play” on AI.
Big Tech muscles in…
AI is machine-displayed intelligence that simulates human behavior or thinking and can be applied to solve specific problems. A sub-set of AI is machine learning, which uses algorithms to produce applications that can perform a variety of complex tasks.
Whether in factory automation, customer service, or medical research, AI is increasingly a part of our daily lives. AI’s uses are expanding exponentially. Startups are fueling innovation in AI, but Big Tech already has invaded the industry.
Alphabet (NSDQ: GOOGL), Amazon (NSDQ: AMZN), Apple (NSDQ: AAPL), IBM (NYSE: IBM), Intel (NSDQ: INTC), Meta Platforms (NSDQ: META), Microsoft (NSDQ: MSFT), Netflix (NSDQ: NFLX), and NVIDIA (NSDQ: NVDA), have all invested heavily in AI.
Microsoft has poured billions of dollars into a partnership with OpenAI, the maker of the now-infamous ChatGPT chatbot service. Shares of chipmaker NVIDIA soared Thursday in the wake of an earnings beat driven by AI chips.
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However, few publicly traded companies narrowly specialize in AI, and those that do are getting snapped up fast. In fact, Apple is the leading buyer of companies in the global AI market.
I’ve been researching the AI field for several months, and in that time two of the companies I thought were the most promising were bought out before I even had a chance to recommend them. Clearly, this is not an area where you can afford to let grass grow under your feet.
The power of miniaturization…
With processors now both smaller and more powerful, we’re at the point where it is increasingly possible to develop AI further. A new generation of artificial neural networks, originally developed in the 1950s as a way for a computer to mimic nerve cells in the human brain, has become available. That has created the field of deep learning, which trains those artificial networks by putting them through millions of exercises and then adjusting the network parameters to get the desired result.
The Internet of Things (IoT) is on track to remain a profitable trend, as more and more devices are connected to the Internet to share data. Demand for smart health care devices is expected to be a key driver of IoT growth in the U.S. and Europe, while continued adaption of advanced factory automation systems should lead the trend in Europe and the Asia-Pacific.
According to Gartner: “IT leaders interested in using AI solutions in the workplace [can] gain support for this technology by demonstrating that AI is not meant to replace or take over the workforce. Rather, it can help workers be more effective and work on higher-value tasks.” The following chart shows how AI enhances productivity around the world:
The size of the global AI market was valued at USD 136.55 billion in 2022 and is projected to expand at a compound annual growth rate of 37.3% from 2023 to 2030, according to Grand View Research.
Grand View states in a recent report: “The continuous research and innovation directed by tech giants are driving the adoption of advanced technologies in industry verticals, such as automotive, health care, retail, finance, and manufacturing.”
AI as a service…
All of which brings me to C3.ai (NYSE: AI). Whereas most of the players in AI are mega-cap household names with diversified business segments, AI is the sole emphasis at C3.ai.
Based in Redwood City, California in the heart of Silicon Valley, C3.ai is a software-as-a-service (SaaS) company whose software enables clients to operate enterprise-wide AI applications. The company’s software tools allow end users to wield AI to accelerate software development with less cost and risk.
Founded in 2009, C3.ai offers a wide range of applications to customers in North America, Europe, the Middle East, Africa, and the Asia-Pacific. It offers the C3 AI application platform, which enables customers to design, develop, and deploy enterprise AI applications; C3 AI Ex Machina for analysis-ready data; C3 AI CRM, a customer relationship management solution; and C3 AI Data Vision that visualizes, understands, and leverages the relationships among data entities.
C3.ai also offers C3 AI applications, including C3 AI Inventory Optimization; C3 AI Supply Network Risk to manage supply chains; C3 AI Customer Churn Management, for customer service and management; C3 AI Production Schedule Optimization, for scheduling production; C3 AI Predictive Maintenance; C3 AI Fraud Detection; and C3 AI Energy Management solution.
In addition, the company offers integrated turnkey enterprise AI applications for oil and gas, chemicals, utilities, manufacturing, financial services, defense, intelligence, aerospace, health care, and telecommunications market segments.
C3.ai boasts a $250 million AI contract with Microsoft, supporting ChatGPT creator OpenAI. C3.ai provides enterprise AI services to Google Cloud and the U.S. Department of Defense, U.S. Department of Energy, the U.S. Air Force, and the U.S. Department of Health and Human Services.
With a market cap of $2.4 billion, C3.ai occupies the mid-cap “sweet spot.” It’s large enough to enjoy stability and financial staying power, but it’s small enough whereby it’s easier to “move the needle” for growth.
C3.ai has been unprofitable in recent quarters, due to its heavy investment in research and development (R&D), but its bottom line is about to get a lot better. The average analyst expectation is that C3.ai’s year-over-year earnings growth will reach at least 50.90% over the next five years (on an annualized basis). The company has total cash on hand of $840 million (most recent quarter), a sizeable war chest for R&D and acquisitions.
Speaking of acquisitions, C3.ai is a tempting takeover target by a tech behemoth looking to gobble up the smaller company’s innovative technology. If that happens, existing C3.ai shareholders would reap a windfall.
Year to date, C3.ai’s stock has jumped nearly 100%, driven by the media’s increasing fascination with artificial intelligence. I think the stock has much further to run, but there’s no denying that it has gotten pricey.
However, before the run-up, the stock was absurdly undervalued. Now valued at roughly 10 times sales, C3.ai sports a reasonable valuation in light of its massive growth prospects.
You’ll probably experience ups-and-downs with this tech stock; AI is an inherently volatile business. But one of the best ways to build wealth over the long haul is to tap multi-year trends with inexorable global momentum. That’s why C3.ai belongs in any long-term growth portfolio.
PS: In a new report, my colleague Dr. Joe Duarte unveils a tech disruption worth $75 trillion, and it all starts with one under-the-radar $3 stock. Learn more by clicking here.
John Persinos is the editorial director of Investing Daily.
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