Generative Artificial intelligence (AI) has been making waves since Chat GPT popularized the concept in November 2022. The biggest beneficiary of this AI wave was Nvidia (NASDAQ: NVDA), as its graphic processing units (GPUs) power AI workload. The stock has surged 800% since November 2022, riding the generative AI wave. This huge surge has made the stock expensive in terms of valuation. While Nvidia is still a stock to buy in the AI boom, you could also consider other stocks adopting AI.
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Tech stocks that could benefit from the AI boom
The role of Nvidia in AI is to provide the hardware ecosystem with software support. However, you can monetize on the AI boom by investing across the supply chain.
AI is a technology that helps computers think and act like humans and deliver more intelligent solutions customized to individual needs. Many companies, from commerce to digital services, are adopting AI solutions to reduce costs and enhance efficiency. Helping these customers is a small tech company Coveo Solutions (TSX: CVO).
Coveo Solutions stock
Coveo Relevance Augmented Generative Answering (CRGA) platform uses AI to power searches and make recommendations. Many companies are using CRGA to reduce or replace the need for contact centres. It has successfully helped Xero with AI-powered digital transition and is now working on more than 75 large GenAI enterprise projects at various stages.
The company’s business model is a software-as-a-service (Saas), where it earns money from subscriptions and customer retention. The business model prospers if it can add new customers, cross-sell products to existing ones, and increase average revenue per user while reducing the churn rate. All this is possible if the product is sticky and has fewer alternatives.
In the last two years since CRGA was developed, the company has seen 15% annual revenue growth and a 95% average retention rate. Since it is still new, it is spending 43% of its revenue on marketing to acquire more customers. While the growth seems good and steady, the stock is expensive as the fundamentals are still weak. The company is still making a loss, and its FY25 revenue growth guidance is 0 to 3%. The AI-powered search leader needs more scale for revenue to cover its expenses and to break even.
On the positive side, if Coveo continues to grow its revenue steadily, it could become profitable. So far, it has reduced its net loss to US$23.6 million in FY24 from US$39.7 million last year. It also has ample cash (US$166.6 million) to fund its losses and grow revenue.
Is Coveo the AI stock to buy at the dip?
In July, the stock fell 17% as its biggest shareholder and the only institutional investor, Elliott Investment Management, sold most of its stake in the company. Moreover, the 113% surge in stock price from November 2022 to February 2024 during the AI boom has vanished. Coveo’s share price is back to the pre-generative AI level. The noise and speculation around artificial intelligence that inflated Coveo’s stock price has been corrected. However, the company still enjoys good subscription revenue and a high retention rate, making it a buy-and-hold for the long term. CVO has the potential to ride the AI adoption rally.
Similar to Coveo, you could invest in other SaaS and technology service companies offering AI-driven solutions, like OpenText and Telus International.
