shares of C3.ai (AI -7.08%) This year saw a further rise in the wave of hype surrounding artificial intelligence technology. The rise is certainly not due to the company’s performance. Revenues are flat and losses are huge as C3.ai moves from a subscription-based model to a consumption-based model. The company sells its AI application development platform and AI application suite to large enterprises, which means long sales cycles and high sales and marketing costs.
Shares tumbled Thursday after a rough earnings report for the fourth quarter of the fiscal year ended April 30. With sales unchanged from the same period last year and a worsening net loss, the company expects sales to continue declining in the first quarter of the fiscal year. 2024.
What is the AI Boom?
According to C3.ai’s earnings report, “Interest in applying AI to business processes has never been more active.” Despite this growing interest, the company expects his revenue growth to slow in fiscal 2024. C3.ai expects full-year revenue to rise from $295 million to $320 million for the full year, which equates to about 15% growth at the midpoint. Considering the explosive interest in AI and the fact that C3.ai’s fiscal year is just beginning, the growth rate is staggering.
One of the things that’s changed in C3.ai’s business is the shift in focus from an AI development platform to a suite of AI applications. The company sells a wide range of enterprise software products that address customer relationship management, inventory optimization, demand forecasting, cash management, commercial real estate valuation, and a variety of other functions.
What are the advantages of C3.ai in application software? Using AI as a selling point is fine, but nearly every software company is looking for ways to integrate AI into their products.Customer Relationship Management (CRM) Leader SalesforceFor example, in March, the company announced a generative AI capability called Einstein GPT, enabling customers to generate personalized emails, create targeted content, and code.
C3.ai’s products certainly haven’t sold well, but the company is seeing increased interest in shortened sales cycles thanks to its six-month testing program. His average sales cycle in the fourth quarter was 3.7 months, down from 5 months in the same period last year, and the pipeline of potential deals has strengthened over the past year. But all this comes at a cost.
C3.ai spent $51.7 million on sales and marketing in the fourth quarter, which consumed all of its gross margin and spent over 70% of its total revenue. R&D spending was about the same, and all costs combined resulted in an operating loss of $73.3 million on revenue of $72.4 million. Free cash flow was positive in the fourth quarter as the company relies heavily on stock-based compensation.
Confused coming-of-age story
Blue chip stocks often have a simple story.for Nvidia, another stock booming thanks to the AI boom, is very simple. NVIDIA designs powerful chips used to train and run advanced AI models.
In contrast, C3.ai sells a wide range of enterprise software applications. It competes with incumbent software vendors who are increasingly incorporating his AI capabilities into their products. Interest in the company’s products is growing, but not enough to give him a 15% boost to revenue growth this year. For a small company like C3.ai operating in one of the hottest areas of the tech industry, it’s hard to imagine this guidance being anything but a huge disappointment.
With a valuation of $4.5 billion before Thursday’s plunge, C3.ai stock is at a premium valuation that doesn’t seem worth it. Things may work out for the company in the long run, but at the moment C3.ai doesn’t seem like an attractive investment.
Timothy Green has no positions in any of the mentioned stocks. The Motley Fool has positions with and endorses Nvidia and Salesforce. The Motley Fool recommends his C3.ai. The Motley Fool has a disclosure policy.
