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The tech-heavy Nasdaq 100 Index ($IUXX) has had a pretty decent run so far in 2023, rising 38% to more than double the percentage gains of the S&P 500 Index ($SPX) - which is up just 15.6% since the start of the year. This rise has been fueled in large part by euphoria around the artificial intelligence (AI) space, with Nvidia (NVDA) being the most noteworthy beneficiary.
And the prospects are only expected to get better for AI and AI-related industries. According to a recent study by Statista, the global AI market is forecast to reach about $1.85 trillion by 2030, up from roughly $207.9 billion in 2023.
That said, some AI stocks have run up quite a bit already, which makes their valuations less than appealing at current levels. Here, we'll discuss three AI stocks that have outperformed so far in 2023 - but analysts don't recommend buying any of them right now.
Upstart Holdings
Founded in 2018 by former Google (GOOGL) executives Dave Girouard and Anna Counselman along with Thiel Fellow Paul Gu, Upstart (UPST) harnesses the power of AI to assess borrowers' creditworthiness, taking into account a wider range of factors than traditional credit scores. Upstart currently commands a market cap of $2.42 billion.
Shares of the company have rallied 118% on a YTD basis, but that includes a steep pullback of more than 58% since the start of August.
The downward spiral in the share price can be attributed to a broader risk-off attitude among investors that hit growth stocks across the board, but UPST also dropped after its second-quarter earnings report. In the April-June period, Upstart’s revenues fell 40.5% year-over-year to $135.8 million, which topped the consensus estimate - as did adjusted earnings of $0.06 per share. However, the company's third-quarter guidance was softer than expected.
Upstart's decline in some of the key metrics relevant for platform companies was worrying, too. The AI-enabled lending platform's transaction volumes fell by 65.9% from the previous year to 109,447 loans, while its conversion rate dropped to 9% from 13% in the year-ago period. Meanwhile, contribution profit slipped by 21% YoY to $95.9 million.
Finally, Upstart's valuations remain at elevated levels compared to its sector average. Upstart's forward ev/sales (5.68), price/sales (4.58) and price/book (3.80) ratios are all above the sector medians of 2.95, 2.27 and 1.02, respectively.
On balance, analysts are expecting Upstart to report an earnings decline of about 84% for FY 23.
Analysts are unusually bearish on Upstart overall, as reflected in their “Moderate Sell” rating on the stock with a mean target price of $24 - which indicates a discount of about 16% from current levels. Out of 13 analysts covering the stock, 7 have a “Strong Sell” rating, 1 has a “Moderate Sell” rating, 4 have a “Hold” rating and only 1 has a “Strong Buy” rating.
Palantir Technologies
Established in 2003, Palantir Technologies (PLTR) counts Peter Thiel, a co-founder of PayPal (PYPL), as one of its co-founders. A company that uses AI and specializes in big data analytics, Palantir's software is used in a wide range of industries, including national security, financial services, and healthcare, among others. Palantir's market cap currently stands at $33.26 billion.
Palantir stock has rallied about 137.5% on a YTD basis. However, like UPST, it has dropped sharply since the start of August, and is down more than 23% since then.
Palantir's latest earnings results were solid, as both revenue and earnings managed to meet analyst expectations. Revenues grew by 12.7% from the prior year to $533.3 million, and the company reported adjusted EPS of $0.05, reversing a loss of $0.01 per share in the previous year.
Along with increasing customer count, billings and adjusted free cash flow in the second quarter, the company won a $463 million contract from the United States Special Operations Command in May. Meanwhile, its newest product, AIP, has over 5,000 monthly users now, with 50% MoM growth. Analysts expect Palantir to report earnings growth of 135% in FY 23.
So, what seems to be the problem? To start, Palantir's currently inflated current valuations. PLTR is trading at a forward price/earnings ratio of 68.06, which is well beyond the sector median of 22.19. Plus, its price/book ratio of 10.35 and price/cash flow multiple of 82.47 are also above the sector medians of 3.88 and 18.74, respectively.
Analysts are neutral on the shares, having aligned on a consensus “Hold” rating for the stock with a mean target price of $13.62. This indicates a discount of about 10% from current levels. Out of 14 analysts covering the stock, 5 have a “Strong Sell” rating, 1 has a “Moderate Sell” rating, 5 have a “Hold” rating, 1 has a “Moderate Buy” rating, and 2 have a “Strong Buy” rating.
C3.ai
Founded in 2009 by Thomas Siebel, whose Siebel Systems was acquired by Oracle (ORCL) in 2006, C3.ai (AI) specializes in AI software. The company's range of software products and services is aimed at developing, deploying, and managing AI applications at scale for organizations. C3.ai's customer base includes companies from a variety of industries, ranging from oil and gas, manufacturing, healthcare, financial services, and government. Its market cap currently stands at $3.21 billion.
C3.ai's share price has followed the same general trajectory of its AI-related peers UPST and PLTR. The shares are still up a healthy 143.5% on a YTD basis, despite falling 35% since the start of August.
Although C3.ai's revenue and earnings managed to surpass estimates in its fiscal first quarter, the company has yet to become profitable. For the period ended July 31, C3.ai reported total revenues of $72.4 million, up 10.8% from the previous year and above the consensus estimate of $71.56 million. Meanwhile, the loss per share narrowed to $0.09 from $0.12 in the year-ago period, and was better than the consensus estimate for a loss of $0.17 per share.
However, investors remain unconvinced about C3.ai's shift towards the consumption-based pricing model, which offers lower margins. Further, the company's cash burn (negative free cash flow of $8.9 million) and declining remaining performance obligations ($334.6 million at the end of Q1 24, down 26.9% YoY) have made investors wary about the stock.
Finally, C3.ai's rich valuation at current levels doesn't help matters. The stock is trading at a forward ev/sales ratio of 7.80, compared to the sector median of 2.69. Moreover, its forward price/sales multiple of 10.42 is also above the industry average of 2.63.
For the current quarter, analysts are expecting C3.ai to report an earnings decline of 3.2%.
Overall, analysts have handed out a “Hold” rating on the stock, with a mean target price of $26.09 - about 3.4% below current levels. Out of 14 analysts covering the stock, 2 have a “Strong Sell,” 2 have a “Moderate Sell,” 8 have a “Hold,” and 2 have a “Strong Buy” rating.
