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AI Stocks: How to Invest in a Huge Leap Forwards
Have you backed the newest tech yet? Amid AI investing fever, we’re previewing AI stocks C3.ai, Renalytix and Cerence to help with your next big trade.
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Buenos días and welcome to another issue of Investing Intel from the team at ValueTheMarkets. As always, this edition is chock full of investing ideas, stories and entertainment.
👉 Three stock insights
👉 A news roundup
👉 Investing signals
👉 The finest content from ValueTheMarkets
👉 Key dates for your diary
👉 Some fun facts!
This week we’re focusing on AI.
Since OpenAI’s ChatGPT launched towards the end of last year, AI obsession has gripped the planet. Tech giants like Google owner Alphabet (NASDAQ: GOOGL) and Microsoft (NASDAQ: MSFT) are battling to avoid being left behind by unleashing their own AI offerings.
Whichever way you slice it, AI innovation is already changing people’s lives. Some are terrified that this is the beginning of a Skynet-style robot apocalypse with no time-travelling Schwarzenegger to save us. Others, however, see this as a major tech milestone and a major investment opportunity.
The crew at Investing Intel is inclined towards optimism, so we’re skirting predictions of doom to instead focus on three AI stocks that could be your next investing idea.
The Pure Play - C3.ai (NYSE: AI)
When it comes to pure-play AI stocks, C3.ai (NYSE: AI) is the Super Bowl. No, that’s not because Tom Brady always seems to be there. It’s because C3.ai is the stock that is generating huge chatter and excitement at the moment! You’ll see that in our Investing Signals section later on.
But what’s so thrilling about C3.ai?
The business is behind the C3.ai Application Platform, which allows it and its customers to develop their own enterprise AI applications.
This has allowed the business to develop its own software for broad applications like automated ESG reporting, AI pattern recognition designed for law enforcement and engineering reliability monitoring. Industries touched by C3.ai’s work span from retail and manufacturing to healthcare and transportation.
In short, it could be the company providing the building blocks for a wave of AI innovation.
This exciting product offering has resulted in contracts with some huge names, including Microsoft, Alphabet, Amazon and The US Department of Defense.
So, it’s a business on the cutting edge which is attracting top-tier clientele. What’s not to like?
Well, the company’s numbers don’t necessarily paint the brightest picture.
First off, the stock price has tanked since its IPO in December 2020, losing 80%.
Its financials also paint a picture of a growth stock with little to show in the way of profit. In fact, C3.ai’s net losses are significant at $192m in 2022, with analysts projecting this to increase to more than $300m for the ongoing year according to Motley Fool.
Revenues are on the up but are being outpaced by costs leading to net losses of $140.7m over the six months ended 31 October. Even so, the business’s most recent earnings said it expects to be operating profitably on a non-GAAP basis and be cash positive by the end of fiscal 2024.
To spur on this change, C3.ai has evolved away from a subscription-based model and is instead charging customers based on their specific usage of its products. The company’s CEO, Tom Siebel, told CNBC in December that the change was expected to increase customer engagement by “an order of magnitude” within a few quarters, adding that the change had been “very well received”.
And these strong words emphasise the big week that lies ahead for the company. That’s because it's reporting its financial results for its third quarter on Thursday. Could these earnings offer insight into how successful the business’ price structure changes have been?
We shall have to wait to find out, but the update is going to be written in bold red pen in a lot of investors’ diaries.
While some appear sceptical of C3.ai’s prospects, others have been swept up in the pervading atmosphere of AI excitement in their decision to back the stock. With C3.ai, the likeable facets are its AI-heavy product suite, which leaves the business ideally located to benefit from a boom in the industry and its increasingly strong customer base. This boom may have already begun.
However, it’s worth bearing in mind that this investment would be speculative and probably unsuitable for more cautious traders.
The Healthcare Innovator - Renalytix
For many of us, the COVID-19 pandemic revealed just how overburdened our hospitals and healthcare facilities have become. When doctors, nurses and other healthcare workers simply have too much to manage, it’s easy for patients to fall through the cracks and fail to receive the treatment they need.
That’s a problem Renalytix (NASDAQ: RNLX) is seeking to solve.
This outfit is less of an AI pure play, but ably demonstrates the many possible applications for the technology.
Renalytix is a marriage between artificial intelligence and healthcare. As might have been evident from the name, particularly to those with a working knowledge of physiology, the business is dedicated to the elimination of kidney disease.
So, where does the AI facet come into the picture?
The answer is KidneyIntelX. This is Renalytix’s proprietary platform, which uses an AI-enabled algorithm to score patients’ kidney disease risk levels to inform decisions made throughout their individual treatment journey.
It seems to work well too, with a succession of studies showing that the use of KidneyIntelX in primary care settings resulted in improved clinical decision-making and action taken for high-risk patients.
But it’s not just good enough that the product works – there needs to be an addressable market too. Renalytix is covered there too, with untreated kidney disease resulting in 50,000 Americans having kidney failure, dialysis or kidney transplants each year.
So how do the numbers stack up?
The most recent quarter saw Renalytix’s revenues more than double from $482,000 to $969,000, while gross profits crept upward by 7% to $273,000. The business is operating at a loss, with a net loss of $12.0m for the most recent period but has significant capital reserves.
Cash and cash equivalents stood at $31m at the end of September 2022, while the business has since raised more than $20m from a private placement. This should secure Renalytix’s immediate future.
Even so, the company’s cash burn is significant and serious growth in revenue generation needs to occur soon or the business risks bankruptcy or considerably diluting shareholders’ interests through further attempts to raise capital.
As such, Renalytix is not for the faint-hearted. The clock is ticking for the company, but positive signs include a well-designed and functioning product, a large addressable market and some small revenue growth.
The Robocar - Cerence (NASDAQ: CRNC)
Do you get lonely on the road? Have you ever wished you could have a conversation with your car? Did you watch Knight Rider and feel disappointed that your vehicle wasn’t as chatty as David Hasselhoff’s?
If so, Cerence (NASDAQ: CRNC) is a business that might pique your interest.
Like Renalytix, it’s another business which demonstrates the broad applications of AI technology, but in Cerence this is geared towards in-car assistance.
The company’s core product suite includes Co-Pilot, which allows users to access apps, content, and services directly through voice-based interactions, and Drive, a voice-controlled assistant which helps drivers with everything from finding parking locations to the best-priced gas stations.
The company’s technology is present in a wide variety of vehicles, from German luxury stalwart Mercedes Benz to Chinese electric vehicle outfit Nio (NYSE: NIO).
The business’ share price had a rough time in 2022, with the inflation fears that damaged a lot of growth stocks helping to push its share price down from north of $75 to below $20 a pop. The year to date has been more positive though, with a 40% increase to its current price of $27.08.
While some of this might be attributable to general stock market health and excitement surrounding the AI space, the company’s earnings (released on 8 February) also surpassed consensus expectations. Earnings came in at $0.36 per share compared to estimates of $0.09, when using non-GAAP measures. Meanwhile, its revenue of $83.7m was also ahead.
While these figures may have topped even Cerence’s estimates, they still lag behind the company’s performance 12 months prior. But with more than $90m in cash and cash equivalents, the business looks to have some space to manoeuvre before it runs out of road.
Challenging times are not over yet for the business, with CEO Stefan Ortmanns having noted in the earnings release that Cerence’s customers are “navigating a cloudy macro environment due to issues such as semiconductor shortages”.
Beating targets is a good sign though, and other financial metrics also play out favourably for the business. Its price-to-sales ratio of 3.44 is well below the 7.21 average for the software and programming industry, while its price-to-book ratio of 1.55 is also considerably lower than industry peers.
These appear to indicate that the company is undervalued despite its recent boost.
Couple this with Cerence’s strong product offering and solid financial situation (as well as the fact it reminds us of Knight Rider), and the stock looks like a potential investing idea.
News in Brief
China Crisis. Concern that China could begin to supply Russia’s war effort in Ukraine with lethal weapons is growing in the Western world. This week saw China’s top diplomat, Wang Yi, met with Vladimir Putin. Over the weekend, the Far Eastern nation also declined to endorse a G20 statement condemning Russian aggression. US relations with China could be about to get pretty sour.
The House That Joe Built. The Biden Administration will seek to make homeownership more accessible by cutting costs associated with mortgages. The news comes after data released last week showed the US housing market shrank by $2.3trn in H2 2022, its biggest drop since the 2008 financial crisis.
The Fifth Element. Finally, there’s the news that flying cars could finally be here! South Korean firm SK Telecom wants to launch an airborne taxi service in just two years’ time. As financial scrimpers, we might wait for the dawn of the flying bus before taking off on a daily basis.
This section uses under-the-radar data to point out some of the stock market’s hottest movers and shakers. Let’s get into it:
🤖 C3.ai (NYSE: AI) continues to be a major talking point, with the stock being the third most discussed on the influential WallStreetBets subreddit. With earnings due later this week, we expect the intensity surrounding the company to only increase over the coming days.
💾 However, sneaking in ahead is Nvidia (NASDAQ: NVDA), with investors speculating that it will win big from the AI boom. The Times has reported that excitement about the technology has led to demand for the company’s chips going “through the roof”. Indeed, the semiconductor specialist appears well-placed to provide the building materials for this exciting new frontier.
🩺 Lucira Health (NASDAQ: LHDX) is another stock topping the charts. This outfit has been the most-searched company on YouTube and the second most-searched on the web over the last 7 days. Why? Well, it’s a bit of a rollercoaster. On the downside, the COVID testing specialist filed for chapter 11 bankruptcy last week. However, its share price looks set to shoot upward after the FDA authorized the use of Lucira’s at-home testing product. Talk about snatching victory from the jaws of defeat.
🏛️ We’ve also got the inside scoop on Washington lawmakers’ stock-trading antics with figures from Quiver. Defense is clearly on their minds, with the top five DC insider stocks last week being:
🔫 Lockheed Martin (NYSE: LMT)
🛩️ Raytheon Technologies (NYSE: RTX)
🛳️ General Dynamics (NYSE: GD)
📞 AT&T (NYSE: T)
💻 Microsoft (NASDAQ: MSFT)
More Hot Content from ValueTheMarkets
Upcoming IPOs include a Chinese chipmaker, a premium healthcare organization, an agriculture specialist, a solar aficionado and a gaming NFTs outfit.
This week’s company earnings calendar includes Best Buy Company (NYSE: BBY), Target Corp (NYSE: TGT), Cracker Barrel (NASDAQ: CBRL), Dollar Tree Inc (NASDAQ: DLTR), and Nio Inc ADR (NYSE: NIO).
This Week – Dates in the Diary
Tuesday 28th – US Consumer Confidence (February) / Chicago Purchasing Manager’s Index (February)
Wednesday 1st – ISM Manufacturing PMI (February) / US Construction Spending (January)
Thursday 2nd – US Initial Jobless Claims (25 February)
Friday 3rd – ISM Non-Manufacturing PMI (February)
Fun Fact – Shinise: The Kongō Gumi Story
At first glance, Takamatsu Construction Group Co Ltd (TYO: 1762) might look like a fairly innocuous member of the Tokyo Stock Exchange. It’s a construction and civil engineering corporation comprised of over 20 companies under a single umbrella.
But one of those companies ensures that Takamatsu’s story stretches back further than any other company. That business is Kongō Gumi, which was acquired by Takamatsu back in 2006.
Until then, Kongō Gumi had been the world's oldest continuously operated independent company. The Buddhist temple construction specialist was led by more than 40 generations of the same family and was founded 1,445 years ago. That’s more than 18 Joe Bidens ago, and he’s not exactly a spring chicken.
Unfortunately, the business fell on hard times in the early 20th century before being acquired by Takamatsu. While it might be recognised as the oldest company in the world, it’s not exactly an anomaly in Japan.
In fact, the country has so many historical businesses that it even has a special name for them: shinise. These companies, which must have been operating for at least a century, often survive because of the importance and prestige afforded to tradition and loyalty in Japanese society.
This loyalty clearly works. A 2008 study from the Bank of Korea showed that, of all the companies on the planet that are more than 200 years old, more than 50% are in Japan.
While some of these businesses deal in traditional goods like incense, sake and pottery, there is a high-tech outlier. Oddly, gaming giant Nintendo is a contemporary of Kongō Gumi, with the business having started in 1889 as a maker of Karuta, Japanese playing cards.
Until Next Time
Many thanks for taking the time to enjoy Investing Intel today, we hope you’ve enjoyed our insights and are looking forward to more in the week ahead.
See you next week!
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