4 Pure Play AI Stocks: Welcome Back to 1999

by | Last updated Apr 2, 2023 | Market News | 0 comments

AI is bound to change the world and ChatGPT is its “iPhone moment.” Large language models are some of the coolest pieces of technology to hit the market in several years and as such, the stock market is stoked about it.

Unfortunately for traders, there’s not a ton of “pure plays” on AI listed in the markets. When it comes to stable, large-cap stocks, you’re stuck with companies like Microsoft (MSFT) or Nvidia (NVDA) for which AI is just a tiny portion of the underlying business.

For that reason, traders have rushed to buy the smaller pure play stocks like C3.ai (AI), SoundHound AI (SOUN), BigBear.ai (BBAI), and Guardforce AI (GFAI).

We don’t claim to have expertise in any of these stocks. We follow all of them more as trading sardines than companies to be traded based on fundamental changes. Much like crypto, predicting the hype cycle is far more important than the fundamentals behind a specific coin.

Before we get into our list of stocks, lets talk about keeping perspective when a hot new industry pops up.

Keeping Perspective: Echoes of the Dotcom Bubble

The Dotcom Bubble started over 25 years ago with the release of Netscape Navigator, the first mainstream and easy-to-use web browser to enable everyday people to access the world wide web for business, entertainment, or communication purposes.

But while the web quickly became a very important part of business and to a lesser extent, daily life, we didn’t see the revolutionary changes to the broad world for several years.

In terms of pure societal change, the iPhone launch in 2007 as well as broad smartphone and social media adoption in the early 2010s, had a much bigger effect than the release of the web browser. Post-2012 or so, the world around us began to look different in a way that the web browser and desktop-based internet did not do.

The point here is that tech bulls in the 1990s were correct on their view of the web’s significance, but they were wrong on the timeframe which is as bad as being wrong in stock trading.

The vast majority of dotcom companies from the bubble went to zero or were acquired for a fraction of the highs reached during the bubble. However, a small handful of dotcom companies remain juggernauts today like Amazon, Cisco, and Priceline, as well as Yahoo and eBay to a lesser extent.

A Million Little Blodgets

Henry Blodget is one of the poster children of the Dotcom Bubble. He was the Wall Street analyst everyone looked to for the next big stock during the bubble. He wasn’t a programmer or especially well-versed in computing. But the first report he ever published was a buy recommendation on Amazon.com, so people just trusted him. He was in the right place at the right time.

Today there’s a million mini-Blodgets running around on social media, proclaiming themselves AI experts. In the AI hypebeast business, your job is to outdo the next guy. If he says AGI is imminent in the next five years, you say one year. He says one year, you say it’s already here, OpenAI is just keeping it under wraps because they’re afraid.

Like Blodget, these self-proclaimed experts are much better at promoting themselves than legitimate “experts” (we understand the potentially fallacious appeal to authority here) like Stuart Russell who, while they think very deeply about AI safety and the growth of AI, are not making such boisterous claims.

So when the average trader (or any AI-naive person) seeks out information about the sector, they’re far more likely to find these mini-Blodgets than guys like Stuart Russell or Rob Miles.

Let’s end this section with a big fat caveat. The provebial Blodgets could very well turn out correct. But during times of peak hype, its historically been most profitable to bet against hype when it looks like a blow-off top is in the process of forming in a sector, even if there might be months or years of upside still to come.

How the AI Boom is Like the Dotcom Bubble

You can think that AI will radically change the world and the way we do business. A logical conclusion of this belief would be that AI stocks should massively outperform for the next several years. There’s some truth to this.

However, remember that in the dotcom bubble, there were thousands of new internet companies. Think of classic examples like Pets.com and Webvan. Both of these companies had business models that we see in proliferation today, like Chewy.com and Instacart.

You very well could have seen the writing on the wall that, eventually people would be shopping for their pets online and that online grocery delivery could scale. But if you bought Pets or Webvan, you eventually lost all of your money.

So you were technically right, but you both were way too early and bet on the wrong jockey. It’s the same as being wrong.

C3.ai (AI): The Biggest Pure Play Right Now

C3.ai helps companies solve problems with AI. It’s a large platform that offers solutions to several industries. If your company deals has a supply chain, it has a number of tools to use AI to do things like more efficiently manage inventory.

Likewise, it can help intelligence agencies spot threats and patterns in their massive datasets, or help energy companies make their maintenance cycles more efficient. So on and so forth.

Thomas Siebel of Siebel Systems fame is the CEO, a pretty well-respected guy in the enterprise software world.

C3 is by far the best performing and most resilient of these stocks. Take a look at its chart:

SoundHound AI (SOUN): A Play on the Connected Car

SoundHound (SOUN) develops AI voice assistant technology. They basically try to do Siri with more powerful AI models. Right now most of SoundHound’s customers are carmakers, which is an excellent use case for the technology.

While cars with Apple CarPlay and similar infotainment systems already have some semblance of a digital assistant, Siri and Google Assistant leave a lot to be desired. Sure, you can tell Siri to “call John” or ask you to read a text message to you but the utility isn’t that great beyond simple stuff that we’ve had for several years.

Imagine a halfway capable AI voice assistant which you can use to help you prepare for a sales presentation on your commute.

While automotive is the company’s big growth category, counting most of the large OEMs as category, it offers solutions to drive-thru restaurants, smart products (TVs, streaming platforms), customer service, hotels, and a number of other verticals.

SoundHound is a victim of the SPAC boom and bust. The company was acquired by a SPAC in late 2021, but didn’t actually list until 2022 when the bust was well underway. As such, the stock went down in a straight line from its IPO date, temporarily dropping below $1. The stock is off its lows, but still has lots of ground to make up.

Here’s how the stock has fared since the AI boom started. As you can see, its nowhere as resilient as C3.ai.

BigBear.ai (BBAI): Another DeSPAC Zombie

BigBear’s products are a bit more opaque than the rest because of its focus on defense and intelligence companies. Hard to figure out exactly what the company does for this reason. A once-over of the SEC filings tells us that they’re trying to be a bit like a mini Palantir.

This is another deSPAC equity which has also been hit really hard by the death of SPACs. It’s been the target of some activist short selling campaigns for its lack of financial liquidity, promotional nature, and lack of profits. Amazingly, the company did $155M in revenue in 2022 with $121M in losses.

Here’s how the stock has fared in the AI boom.

Guardforce AI (GFAI): Robots as a Service?

We don’t claim to have expertise in any of these stocks. We follow all of them more as trading sardines than companies to be traded based on fundamental changes. Much like crypto, predicting the hype cycle is far more important than the fundamentals behind a specific coin.

Guardforce is a Singapore-based company that offers “robots as a service” that can presumably do things like advertising, automatic disinfection and cleaning, security, and contactless vending and delivery.

It’s a Singapore-based company that just regained compliance with Nasdaq as a result of a 1:40 reverse split, so keep that in mind.

Here’s how the stock has fared throughout the AI boom. Notice that it’s only recently become a benefactor, rising 45% on Friday, March 31.


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