A news report illustrating the level of spending on AI chip manufacturing appears to have set off a wave of buying.
Developments in the field of artificial intelligence (AI) have been among the biggest drivers of the market’s growth over the past year or so. The abilities of these algorithms have taken significant leaps forward, allowing people and organizations to automate time-consuming tasks and generate original content. The results are time savings and increased productivity, so businesses are naturally eager to find more ways to deploy AI. As a result, companies in the field have experienced surges in demand, though there have been inevitable ebbs and flows.
With that as a backdrop, on Tuesday, shares of several players in the AI space popped: As of 2:15 p.m. ET, data mining and analytics provider BigBear.ai (BBAI 9.52%) was up 6.5%, AI solutions provider C3.ai (AI 5.21%) had climbed 4.1%, and Indie Semiconductor (INDI 6.18%) had gained 6%.
A review of all the usual potential drivers of share price moves — financial reports, regulatory filings, and changes to analysts’ opinions — turned up nothing in the way of company-specific news about any of these AI stocks. This suggests that most of the investors bidding them up might have been focused on a news report published this week suggesting that world governments are spending big on AI and that the spending spree is expected to continue.
Image source: Getty Images.
A sign of continuing demand
Some of the world’s biggest governments, led by the U.S. and the European Union, have embraced the enormous potential represented by generative AI and are spending accordingly to help usher in the next era of development, according to a Bloomberg article. These global superpowers have spent nearly $81 billion to expand the manufacturing of the high-end semiconductors that underpin the groundbreaking technology.
Chip shortages were prevalent during the pandemic, and the difficulties those supply problems caused only served to highlight the importance of the high-speed processors that not only power AI, but are found in consumer electronic devices, cloud computing centers, and data centers. This realization spurred governments to subsidize investments in facilities that can manufacture these high-end semiconductors.
The U.S. has forged ahead by providing incentives from the CHIPS Act to a number of companies to expand production on American soil. For example, Intel and Taiwan Semiconductor Manufacturing have received $8.5 billion and $6.6 billion, respectively, while Micron Technology and GlobalFoundries received $6.1 billion and $1.5 billion, respectively.
It’s worth noting that Nvidia Jensen Huang has repeatedly said that every country should endeavor to develop its own “sovereign AI infrastructure” in order to participate in the economic benefits resulting from AI. The heavy spending by the U.S. and other countries suggests their leaders may well agree with him.
A tangential connection
So what does this have to do with our trio of AI stocks? In a word, nothing — at least not directly. However, as has been the case over the past year or so, many AI stocks, particularly smaller, more volatile ones, tend to get swept up in the excitement every time there’s news — positive or negative — in the space. A look at these companies suggests only tenuous connections between the expectation of heavy chip infrastructure spending and the businesses of two of them:
- BigBear.ai’s AI-powered decision intelligence solutions could get a boost from enterprises looking to adopt AI.
- C3.ai offers pre-built AI models designed to help businesses get AI-centric applications up and running quickly.
- Indie Semiconductor manufactures chips used in driver assistance systems.
Indie Semiconductor is also investing $10 million in an engineering design center in Auburn Hills, Michigan, and hopes to benefit from state and federal incentives available to chipmakers, though no award has yet been granted.
A word of caution
Investors should exercise care, and avoid painting all AI companies with the same brush. While a growing number of companies have already found ways to profit from the AI trend, BigBear.ai, C3.ai, and Indie Semiconductor aren’t among them. Consider these highlights from each company’s most recent quarter:
- BigBear.ai’s revenue declined by 21%, and it isn’t profitable.
- C3.ai’s revenue grew by 18%, and it isn’t profitable.
- Indie Semiconductor grew revenue by 29%, and it isn’t profitable.
That isn’t to say these companies won’t eventually prosper from the AI boom, but given what we know now, their stocks are certainly on the riskier end of the spectrum.
Then, there’s the matter of valuation. C3.ai is the most expensive of the three at 7 times expected forward sales, while Indie Semiconductor and BigBear.ai are currently each trading for roughly 2 times forward sales.
Personally, I wouldn’t invest in any of these companies, as they haven’t yet started living up to their AI potential. For investors who do decide to take the plunge into BigBear.ai, C3.ai, or Indie Semiconductor, these stocks should account for only a small slice of a well-balanced portfolio.
Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends C3.ai and Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.