AI Stocks Risk Collapse Despite Nvidia's Surge

The expansion of the artificial intelligence (AI) business over the past ten years has made

Nvidia (NASDAQ: NVDA) one of the hottest tech stocks. The chipmaker entered the

data center market with more potent GPUs that made processing AI tasks easier.

Previously, the majority of the company's earnings came from gaming GPUs.

Large corporations enhanced their AI capabilities, and Nvidia's company was severely

hurt by this first-mover advantage. Because of this, its stock has increased 16,570% in

the last ten years while its revenue rose at an amazing compound annual growth rate

(CAGR) of 31% from fiscal 2014 to fiscal 2024 (which concluded this January).

Analysts predict that from fiscal 2024 to fiscal 2027, its revenue will increase at a

compound annual growth rate of 35%.

Based on those growth rates, it appears that Nvidia is still one of the simplest ways to

benefit from the long-term growth of the AI business. Regretfully, not every tech

business concentrating on the AI space has the same chance of long-term success as

Nvidia. Therefore, I'll be concentrating on two weaker AI stocks today—auto chipmaker

Mobileye (NASDAQ: MBLY) and AI software maker C3.ai (NYSE: AI)—that may lose

value even as the market as a whole grows.

C3.ai confronts existential issues

C3.ai creates AI algorithms that may be integrated with an organization's current software

to expedite, simplify, and automate specific processes. That sounds like a good approach,

but it's up against stiff competition and gets roughly 30% of its income from a joint

venture with the massive energy company Baker Hughes. There is no assurance that the

agreement will be extended when it expires in April 2025, which is the conclusion of the

fiscal year 2025.

Revenue at C3.ai increased by just 6% in the fiscal year 2023, slowing down from 38%

growth in the previous year and falling short of the company's initial goal of 22% to 25%

growth. It attributed the slowdown to both the general economic downturn and the

sudden switch from its more restrictive subscription-based plans to more accommodating

usage-based rates. Although C3.ai says it can boost its revenue by 11% to 20% in the

upcoming fiscal year, its track record of making big promises and falling short of them

makes it difficult to have any faith in that bullish forecast.

The firm decided in September of last year to forgo its initial target of turning a profit on a

non-GAAP (adjusted) basis by the end of its fiscal 2024, which concludes in April, in

favor of creating and promoting additional algorithms for the generative AI market. Even

if the situation appears bad, C3.ai's stock still looks pricey at ten times this year's sales,

despite the fact that it has declined by about 40% from the price of its initial public

offering (IPO). Its insiders most likely sold more than seven times as many shares as they

had purchased within the previous 12 months for this reason.

Mobileye's cyclical downturn is quite severe.

The world's leading manufacturer of advanced driver assistance systems (ADAS), which

employ chips, cameras, and sensors to help drivers park their cars, stay in the right lane,

and access other semiautonomous driving features, is Mobileye, which split off from Intel

in an IPO in 2022. Instead of using Intel's own foundries, these devices are powered by its

own EyeQ computer vision chips, which are produced by longtime partner

STMicroelectronics (NYSE: STM).

Though it confronts a difficult slowdown, Mobileye may look like a terrific method to

invest in the expanding connected and driverless vehicle industry. Its sales increased by

22% in 2022 and 11% in 2023, but in 2024 it anticipates a 6%–12% decrease.

Many of Mobileye's clients overstocked on EyeQ chips in 2021 and 2022 in an attempt to

protect themselves from supply chain difficulties. In order to address supply chain

problems in the first half of 2022, Mobileye additionally increased its orders for chips

from STMicroelectronics in the second part of the year.

By the end of 2023, Mobileye experienced a supply oversupply of roughly 6 million to

7 million EyeQ chips as a result of these two issues. Analysts predict that as it grinds

through the surplus inventory, adjusted earnings will fall by 51% this year.

In spite of the fact that Mobileye's stock has lost about 40% of its value in the last 12

months, its current valuation of 62 times forward earnings suggests that the company will

probably recover from this cyclical dip over the next few years. Given that Intel, which

still holds the majority of the shares in Mobileye, sold the company for $1.5 billion last

year, it could be wise to avoid this out-of-favor chip stock until a few more signs of

improvement surface.