Artificial intelligence (AI) and machine learning is touching and disrupting many industries, with the global AI market set to grow at a compound annual growth rate of 40% until 2028. We delve into two companies focused on this opportunity and ask which is a better buy?
C3.ai (NYSE: AI) is a pure-play in the AI space as it provides services to build enterprise-scale AI applications.
It allows customers across various industries to deploy AI applications more efficiently. The company arguably has the first-mover advantage in the space with 1.7 billion predictions per day and evaluating 33.8 billion machine learning features daily.
It has been successful in its 'lighthouse' strategy where it attracts large customers in particular industries as a proof of concept prior to attracting smaller players. These customers include Fortune 500 companies such as Shell and government organizations like the U.S. Air Force.
C3.ai operates a SaaS business model leading to a highly predictable revenue stream that accounts for the vast majority of revenue. In Q2 of fiscal 2022, revenue was $58.3 million, increasing 41% year-over-year (YoY) with relatively high gross margins of 73%.
However, there is competition from larger players who create solutions in-house. There is also a customer concentration risk, with Baker Hughes accounting for a significant chunk of revenue. This means that the company will have to attract more large customers to diversify its revenue stream. C3.ai is also operating at a loss that more than tripled YoY, reaching $56.4 million in the quarter.
Upstart (NASDAQ: UPST) is an AI lending platform attempting to make it fairer for people to access credit based on true risk. Unlike many traditional financial institutions, Upstart believes that "the emergence of machine learning in lending will entirely reshape the banking and broader credit industry in the next 10 years".
Instead of using conventional methods to assess risk, such as the FICO score, Upstart uses machine learning which analyses over 1,600 variables. Over time, due to machine learning, its algorithm should become increasingly accurate in judging a borrower's ability to repay. It also provides a value proposition to both lenders it partners with and consumers, which is crucial.
The company continues to grow rapidly and reported 250% revenue growth in Q3 of fiscal 2021, reaching $228 million. It has also turned a profit over the last year with a net income of $29.1 million in Q3. Upstart initially only offered personal loans but has expanded into auto loans, dramatically increasing its addressable market.
The most pertinent risk is its customer concentration, with Cross River Bank accounting for 59% of revenue for the nine months ending September 2021. If it were to lose Cross River Bank as a customer, this could be disastrous for the stock.
Although there is a customer concentration risk, Upstart appears to be a better buy due to its high growth rates, profitability, and value proposition.
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