C3.ai (NYSE: AI) Stocks have benefited from growing interest in artificial intelligence (AI) applications and services, but they have recently seen a big sell-off amid allegations of misleading accounting practices. Even after the sharp valuation cut, the company’s stock is still up nearly 100% in his 2023 trading.
What’s Next for Controversial AI Companies? Let’s take a look at the bullish and bearish dynamics that could shape stock performance going forward.
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Green Flag: Enough cash to capitalize on industry momentum
The demand for artificial intelligence services is hotter than ever, and it is clear that the industry as a whole is in a very early stage of growth. C3.ai integrates with cloud infrastructure services from leading providers including: Amazon, microsoftand alphabet, and continues to develop new features and service offerings and win new customers. C3.ai faced macroeconomic headwinds in his 2022, but the company’s executives said on a recent conference call that the business is currently benefiting from strong demand tailwinds.
Importantly, C3.ai has a strong cash position to fund its operations, meet new demand and pursue new expansion initiatives. The company closed the third quarter (ending January 31) with approximately $790 million in cash, equivalents and zero debt investments and will be profitable on a non-GAAP (adjusted) basis next fiscal year I predict it will. Although the company is currently operating at a loss, it appears to have sufficient financial footing to fund growth initiatives that could help capitalize on the AI zeitgeist.
Red Light: Reporting C3.ai is under scrutiny
C3.ai’s business foundations have been called into question by a recent letter from short-selling firm Kerrisdale Capital. In a public memo to C3.ai’s auditors, Kerrisdale said the AI services firm sees high turnover in the role of chief financial officer and unclear financial relationships with its biggest customers. I have outlined my concerns. baker fuseShort sellers also alleged that C3.ai inflated gross profit margins and incorrectly classified service- or consulting-oriented revenue as subscription revenue.
Subscription revenue tends to create a more stable and reliable revenue base compared to one-off software and service sales. As a result, companies that generate the majority of their revenue from subscription sales tend to be assigned higher valuation multiples than those that do not. C3.ai reported that 85.6% of his total revenue for the third quarter of the current fiscal year, which ended January 31, came from subscription sales.
C3.ai’s unbilled accounts receivable from Baker Hughes rose from $17 million at the end of the previous quarter to $80 million at the end of the third quarter of this year, according to letters from short sellers, the latter figure at It now accounts for 91% of the company’s turnover. Total unbilled receivables. Kerrisdale noted that actual recorded revenues from the oilfield services company have stagnated, noting that C3.ai is using aggressive accounting to create the appearance of stronger results. suggests.
In its letter, Kerrisdale clarified that it has a short position in C3.ai stock and stands to benefit from a decline in its share price, but investors are advised to consider the concerns recently raised and take steps to reduce the risk on these fronts. You should pay attention to progress. Bearish coverage from short selling may be exaggerated and often doesn’t add up much in the long run, but C3.ai has some big questions to answer.
Red Lights: Speculative Sales Prospects and Dangerous Valuations
Despite growth over the first two quarters of the fiscal year, revenue declined about 4% year-over-year to $66.7 million in the third quarter. The company’s receivables increased significantly in the third quarter, but it’s strange that uncollected revenue has increased significantly while actual recorded sales have decreased.
Even if the concerns raised in the brief report turn out to be largely unfounded, C3.ai’s path to GAAP profitability remains somewhat unclear, with the company’s downfall in light of recent sales performance. Evaluation looks very dangerous.
AI PS Ratio (Forward) data by YCharts.
The AI specialist is trading at about 10 times its expected revenue this year, even though the company’s stock price fell sharply in the wake of Kerrisdale Capital’s letter. This is still a fairly high standard.
So should you buy C3.ai stock?
AI will likely prove to be the most important technology trend of the century, but that doesn’t mean that every company operating in this space will be a winner. The issues raised by Kerrisdale Capital are genuinely worthy of consideration by investors, and C3.ai’s valuation profile deserves closer scrutiny, even if C3.ai’s concerns are shown to be overstated. To do.
C3.ai’s share price appears to be benefiting from growing interest in the AI space as a whole, and it’s not clear if the state of the business justifies the gains the company’s share has made this year. . Therefore, I think investors should avoid stocks now and look for other opportunities in the artificial intelligence space.
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