C3.ai (AI 8.30%) Shares are trading volatile shortly after short sellers issued an open letter to the financial auditors of an artificial intelligence (AI) firm. The software and services company’s shares fell about 32% in April following allegations about his provider’s accounting practices. Meanwhile, the company’s stock is benefiting from increased excitement around AI in 2023, with the stock up about 104% year-to-date.
Should investors buy stocks following recent valuation cuts, or are there still too many downside risks? Let’s.
Bearish: High valuations, limited business visibility
In a letter to C3.ai’s auditors, Kerrisdale Capital highlighted the departure of the AI software and services firm’s CFO as a potential concern, stating that the company’s earnings, unbilled receivables, and gross margins were out of control. It raised questions about accounting practices.
C3.ai has since issued a response letter addressing some of the concerns raised by Kerrisdale. Still, gross margins and other issues should be addressed in future earnings reports. There is also uncertainty about how much emerging AI technologies will actually catalyze business.
C3.ai’s stock surge this year appears to be fueled by the interest surrounding OpenAI’s ChatGPT and the $10 billion investment the technology has attracted. microsoftC3.ai already offers AI-powered software and services, rolling out a generative AI product for enterprise search this spring.
But CEO Tom Siebel said in the company’s final earnings call that the company has yet to figure out how to monetize its new search product. It’s unclear if the AI-driven valuation hype for the business is justified, and although C3.ai’s share price plummeted in the wake of his Kerrisdale critical letter, the company is still at a high multiple. are traded.
AI PS Ratio (Forward) data by YCharts. PS ratio = price to sales ratio.
Midpoint’s guidance calls for approximately $265 million in revenue for the current fiscal year, and management expects revenue to increase by approximately 5% and approximately $71 million in non-GAAP for fiscal 2023. ) (adjusted) operating loss.
The company has moved to a consumption-based billing model this year, but has seen sales headwinds along with the transition. While it looks like a significant amount of revenue is still waiting to materialize, valuations that rely heavily on that growth don’t seem to match recent performance.
Bullish: AI is on fire and C3.ai sales growth could accelerate
A letter to Kerrisdale Capital’s auditors raised concerns that the company was piling up unclaimed receivables from its largest clients. baker fuse, while revenue actually declined year-over-year in Q3 and is expected to decline slightly in Q4. Baker Hughes, on the other hand, is a well-respected and highly trusted name in the oilfield services sector, and C3.ai is correct in stating that many companies in the software sector have unbilled accounts receivable. .
The company has met its remaining performance obligations and is beginning to realize some of its unbilled receivables, which could lead to a significant increase in sales in the next fiscal year. Management expects his 2024 fiscal year, which begins in May, to grow by about 30%, and expects to be profitable on an adjusted basis later in the year.
C3.ai finished the last quarter with about $790 million in cash and equivalents, so it is well capitalized to withstand the growing pains and has entered a new equity offering to fund its operations. You don’t have to look right away.
With a market capitalization of around $2.6 billion, the company is small enough to offer explosive returns if it can dominate in AI software and services. Depending on what the company does with its new AI products and features, C3.ai could be a big winner in the artificial intelligence revolution.
Is C3.ai stock a buy?
I’m certainly not going to short C3.ai’s stock, but ultimately I don’t think it’s enough to justify investing in the software and services player at this point. Even in a corporate context, the company’s valuation profile and somewhat uncertain business outlook make this a speculative play. , I think investors looking for potentially explosive AI investments have better bets for now.
Keith Noonan has no positions in any of the mentioned stocks. The Motley Fool has a position with and recommends Microsoft. The Motley Fool recommends C3.ai. The Motley Fool’s U.S. headquarters has a disclosure policy.
