when C3.ai (AI -5.96%) went public on December 9, 2020 and has generated a lot of buzz for three reasons:was growing rapidly, technology veteran Tom Siebel (he started his previous company, his Siebel Systems Oracle), which had a catchy ticker symbol. These factors, along with the feverish buying of growth and meme stocks, pushed C3.ai from his IPO price of $42 to his all-time high of $177.47 less than two weeks later. But today it’s trading at about $13 per share.
As C3.ai’s valuation peaked, revenue growth slowed, and losses widened, the bulls ditched C3.ai. Rising interest rates have compounded that pain by keeping investors away from more expensive growth stocks. But could C3.ai make an unexpected comeback this year? Check out the 3 top reasons to buy C3.ai and 3 compelling reasons to sell it. , let’s decide.
Image Source: Getty Images.
3 reasons to buy C3.ai
C3.ai develops AI algorithms that can be integrated into an organization’s existing software infrastructure to automate tasks, improve employee safety, reduce costs, and detect financial fraud. These services are offered both as plug-in algorithms and as standalone pre-built services. He has three reasons why the bulls are sticking with his C3.ai. It’s still winning new customers, it expects revenue growth to pick up again, and its stock is significantly cheaper than it was during the meme stock rally’s heyday.
C3.ai ended the second quarter of fiscal year 2023 (ending October last year) with 236 customers. This compares with 228 customers in the previous quarter and 203 customers in the same period last year. secure a new partnership with the U.S. military, alphabetof (GOOG -2.13%) (Google -2.15%) Google Cloud, and microsoft (MSFT -0.42%) the past year.
Regarding C3.ai’s revenue, which is expected to grow only 1% to 2% in fiscal 2023, Siebel said in its latest conference call that it could return to over 30% year-over-year growth within the next 18 years. I predicted. Month. We expect that momentum to return as macroeconomic headwinds ease and large organizations start spending more on software again.
C3.ai is valued at a record $16.7 billion, a whopping 91 times its 2021 revenue of $183 million. At $491 million, it is less than double its projected revenue for fiscal 2023. As of Dec. 29, less than 8% of the float has been shorted, so the bears do not expect any further declines in the short term.
3 reasons to sell C3.ai
C3.ai’s stock price doesn’t look too bubbly right now, but customer focus issues, a sudden shift from subscription to usage-based pricing, and shrinking margins are all still serious problems for the business. suggests that it is in
C3.ai generates almost a third of its revenue from joint ventures with energy giants. baker fuse (BKR -6.09%)This partnership expires in 2025 with no guarantee of renewal. Baker has already cut annual revenue commitments to his joint venture through his two renegotiations with C3.ai in 2020 and his 2021 deal, and last year he took C3.ai’s stake. sold about 15% of Uncertainty about the future with C3.ai and Baker is likely to alienate the bulls.
In terms of business model, C3.ai initially used a subscription-based model. But last August, C3.ai said it would pivot to a usage-based model, charging customers only for the services they access. Siebel claims the change will provide more flexibility for large companies as they spend less to deal with macro headwinds, but it could also reduce per-customer revenue and ecosystem stickiness. I have. That’s why investors should take his Siebel predictions of a return to his 30% growth rate with a grain of salt. Especially after he repeatedly lowered guidance for fiscal 2023 over the past year.
Meanwhile, C3.ai’s gross and operating margins are both headed in the wrong direction, leveraging more promotions and trials to lock in customers. As such, analysts expect C3.ai to remain highly unprofitable for the foreseeable future.
Source: YCharts.
Risks outweigh potential rewards
C3.ai is not doomed yet, but a bearish thesis makes more sense than a bullish thesis. There’s no reason to think it’s a bargain at this level unless it overcomes macro headwinds, renews Baker’s deal, and stabilizes margins.
Alphabet executive Suzanne Frey is a member of The Motley Fool’s board of directors. Leo Sun has a position at Alphabet. The Motley Fool invests in and recommends Alphabet and Microsoft. The Motley Fool recommends C3.ai. The Motley Fool’s U.S. headquarters has a disclosure policy.
