The AI market grew a lot, mainly because generative AI platforms like OpenAI’s ChatGPT expanded quickly. This growth boosted the value of many tech stocks in the last year.
Some of these stock increases made sense. Nvidia’s stock went up because its chips were needed for advanced AI tasks. Microsoft’s big investment in OpenAI and adding AI tools to its cloud services also made it a good choice for benefiting from this ongoing trend.
Except for Nvidia and Microsoft, many tech stocks probably shouldn’t have gone up just because of the growing popularity of AI. I think C3.ai, Palantir, and SoundHound AI are three examples of stocks that might face challenges in 2024.
What’s Going on With C3.ai?
C3.ai creates AI algorithms that can be added to a company’s existing software to speed up and automate specific tasks. This approach seems promising, but C3 still makes about 30% of its money from a joint venture with Baker Hughes, and that deal is expected to end in fiscal 2025 (which concludes in April 2025).
If C3 doesn’t renew this agreement, its revenue could significantly drop. It also faces tough competition from similar AI services directly integrated into Amazon Web Services (AWS), Microsoft’s Azure, and other major cloud platforms. Additionally, robotic process automation (RPA) platforms like UiPath and generative AI services like ChatGPT might pose a threat to its long-term growth.
C3 experienced only a slight 6% increase in revenue in fiscal 2023, in contrast to the significant 38% growth it saw in fiscal 2022. To adapt to the challenging economic conditions, it has shifted from its original subscription plans to offering usage-based plans to attract more customers. Additionally, the company is introducing new tools for generative AI platforms to stay competitive in the AI industry. However, these strategies are expected to keep its profit in the negative for the foreseeable future. Moreover, its stock appears to be relatively expensive, trading at 12 times this year’s sales.
What’s Going on With Palantir?
Palantir, a platform for data mining and analytics collects information from various sources, aiding clients in making informed decisions. The Gotham platform is tailored for government customers, while the Foundry platform provides similar tools for large commercial clients. Currently, the U.S. military and most government agencies in the U.S. use Gotham to gather intelligence.
Since its public debut in 2020, Palantir initially claimed it could achieve a minimum 30% annual revenue growth through 2025. While its revenue increased by 47% in 2020 and 41% in 2021, the growth slowed to 24% in 2022. The projection for 2023 indicates an expected growth of just 16%.
Palantir attributes the slowdown to challenges in the broader economic environment affecting Foundry and the unpredictable timing of government contracts for Gotham. Additionally, it faces competition from similar data mining platforms in the commercial market and internally developed platforms within the U.S. government.
However, there are positive aspects. Palantir managed to maintain profitability in the past year by controlling its expenses, and it introduced a $1 billion buyback plan in August. While these strategies are prudent, they also indicate that Palantir’s business is entering a more mature phase. Despite this, its stock still appears relatively expensive, trading at 60 times forward earnings and 14 times next year’s sales.
What’s Going on With Soundhound AI?
SoundHound AI offers audio and speech recognition services and applications across various industries. Its adaptable services are attractive to companies looking to incorporate audio recognition into their products without relying on major tech players like Microsoft or Alphabet’s Google.
SoundHound continues to experience rapid growth. Its revenue increased by 47% in 2022, and it anticipates a growth range of 44-57% in 2023. However, before going public through a merger with a special purpose acquisition company (SPAC) in 2022, it had informed investors of a projected 41% revenue growth in 2022 and an impressive 245% growth in 2023 as it expanded its business.
SoundHound attributed the slowdown to challenging economic conditions, but it’s evident that the company is facing difficulties in expanding its business while competing with more prominent speech recognition platforms such as Microsoft’s Nuance and Google Assistant. Additionally, SoundHound grapples with customer concentration issues, with over two-thirds of its revenue coming from just three customers in 2022.
Despite appearing reasonably valued at eight times next year’s sales, SoundHound is still incurring significant losses. Moreover, it concluded its latest quarter with a high debt-to-equity ratio of 4.6. These significant drawbacks could potentially lead to a substantial decline for the company in 2024.
Summary
The AI market grew quickly due to platforms like OpenAI’s ChatGPT, benefiting many tech stocks. However, there are concerns. C3.ai faces challenges as a major partnership ends, and it faces strong competition. Palantir, though profitable, has slower growth and a high valuation. SoundHound, despite growing, deals with losses and concentration risks, raising worries for 2024.
