Artificial intelligence stocks fall as economic concerns complicate growth

Artificial intelligence stocks fall as economic concerns complicate growth

Investors and analysts are beginning to move past the hype surrounding artificial intelligence and asking more questions about the near-term growth prospects of AI software companies.

Professional software and service providers, including Palantir Technologies Inc., C3.ai Inc., and Veritone Inc., are touting themselves as high-growth AI companies, offering services to improve the analytics capabilities of companies in sectors such as cybersecurity and telecommunications. But amid a tech market downturn, these companies are struggling to convince Wall Street that they can withstand the pressures of a weakened macroeconomic environment.

“We believe big data analytics projects are more likely to be put on hold in a lower growth environment,” Goldman Sachs analysts said in a Nov. 8 note following the earnings call. of the third quarter of 2022 from Palantir.

All three stocks have been hit hard by the sell-off in tech stocks in 2022, with Palantir and C3.ai both down around 59% year-to-date to Nov. 23. Veritone shares were down about 73%. during the same period.

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Devil in the Data

At their core, AI players are companies that provide a combination of professional services and software to deliver results for clients across all industries. Some analysts say that despite short-term headwinds, AI companies have long-term potential as they continue to evolve and demand for analytical insights increases.

“It’s data companies today, that’s the strategy,” said Tejas Dessai, disruptive technology analyst at Global X ETFs. “Tomorrow they will be able to deliver very specific AI applications on top of that.”

Palantir, for example, works with the US government to provide services to its armed forces, such as military readiness and resource planning solutions. Apart from defense, the company provides other services, including information on the operation of hospitals or detection tools for the fight against money laundering.

C3.ai provides enterprise AI applications across industries, while Veritone helps customers Translate audio, video and other data sources into actionable intelligence.

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Decline in expenses

C3 executives recently warned of the impact of a weaker economy, noting that the company needs to seek more small contracts.

“I think trying to sell $10 million, $20 million, $30 million, $50 million, $60 million next year could be pretty tough,” the C3 CEO and Founder said. , Thomas Siebel, on the September earnings call. “Big chemical companies, manufacturing companies, food companies – I mean, these guys are all going to the bunkers. They’re preparing for a recession.”

C3 faces “massive headwinds” with strong competition in a challenging macroeconomic landscape for next year, Dan Ives, analyst at Wedbush Securities, said in an email.

An advantage for C3, however, is its diverse range of customers. If an AI services company provides offerings to enough sectors, it is bound to be exposed to poor macroeconomic conditions, noted Nick Patience, research director of the AI ​​channel, big data and analytics at 451 Research.

Veritone is in a slightly different situation. Many of its clients are concentrated in the media industry, including a number of cable networks and Sony Pictures.

Although Veritone has grown its revenue significantly in recent years, it has struggled to turn a profit. It also carries a relatively heavy total debt of $200.0 million at the end of the third quarter, giving it a total debt to EBITDA ratio of 13.3x.

They understand the ultimatum

Despite a mixed outlook on AI, analysts say there’s still room for a growth story.

Global X’s Dessai said AI services add value to productivity and current economic conditions are a temporary impediment. The analyst has a bullish outlook for the industry over the next two to three years, albeit with mixed results.

The “Voice of the Enterprise: AI & Machine Learning, Use Cases 2022” study by 451 Research found that of 772 end-user decision makers surveyed, more than 95% expected their organization’s AI initiatives offer a positive return on investment. The highest percentage, 26.2%, expected a return on investment of between 26% and 50%. Nearly 21% expected a return on investment between 51% and 75%. Only 4.6% expected a zero or negative return.

AI companies should focus on providing services that enable organizations to get started with software applications that solve an ongoing organizational problem, a service that people are more willing to pay for even during times of macroeconomic uncertainty. Patience said.

AI companies could also benefit from focusing on industries that have historically performed well in downturns, such as cybersecurity and defense, said Dessai, adding: “What will really be the differentiator [for growth] is in the type of customers these [AI] businesses can share.”

451 Research is part of S&P Global Market Intelligence.

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