Investors are in a never-ending pursuit looking for the next big thing. Artificial Intelligence (AI) looks like the hottest topic on Wall Street in 2023. As technology’s most prominent companies embrace AI, investors are vying for exposure and buying some artificial intelligence stocks.
Count AI software companies C3.ai (AI 8.30%) Among them; the stock has risen about 130% in the past month alone. However, knowing the difference between emotional price movements and price action driven by solid fundamentals is an important distinction. Below you can see which category C3.ai falls into.
Narrowing down the features of C3.ai
Artificial intelligence is a rather fuzzy term for a hot enough topic to talk about. Different AI companies do different things. The most common use of AI today is to better digest and analyze data to improve organizational decision-making. C3.ai provides a variety of AI-powered software applications for businesses and governments.
For example, businesses can use several of C3.ai’s supply chain suite applications to optimize inventory, procurement, or scheduling. Applications in the public sector suite can improve building valuation accuracy and maximize tax revenue. The Defense and Intelligence suite includes applications that analyze intelligence data and provide AI insights to aid decision making.
C3.ai has a three-phase sales cycle, ending with a launch period once the software is successfully implemented and running. Data is definitely everywhere and in nearly every industry. AI therefore has a huge market opportunity. C3.ai management estimates that by 2025 the total market size it can serve will be $596 billion.
Do Fundamentals Justify Stock Prices?
It’s a great story, but it doesn’t lead to long-term investment returns without strong performance. C3.ai currently has some serious concerns. Looking at the chart below, we can see that while revenue growth has slowed dramatically over the past year, cash losses have accelerated. C3.ai made $270 million in revenue in the last four quarters, so it’s not good to run out of $202 million. Especially considering the company issued another $180 million in stock-based compensation.
AI Revenue (Quarterly YoY Growth) Data by YCharts
A few quarters ago, management announced an overhaul of its sales staff and a move to pay-as-you-go pricing. While we believe the new billing model will help growth in the long term, it will negatively impact short-term revenue growth. In other words, new customer deals may not add much to the company until it hits its ramp-up stage later. With the goal of achieving flow, profitability is the goal.
What Should Investors Do?
Better growth and improved profitability are lofty goals, but management must demonstrate results to support them over the next 18 months. Whether intentional or not, C3.ai’s current fundamentals seem flimsy and it’s hard to imagine that the recent rally in the stock is justified. Instead, it looks like a stock with a literal ticker symbol. AI It’s hot as artificial intelligence is being hyped across the market.
I’m not saying C3.ai won’t succeed, but there’s more to lose by chasing the stock now than simply waiting for earnings growth and cash losses to improve before diving in with both feet. If the potential market opportunity is in the hundreds of billions of dollars, growth shouldn’t be too difficult as the company’s revenue in the past year was only $270 million.
Investors looking to own stocks now should build their positions slowly using dollar cost averaging. Otherwise, it may be wise to wait a few quarters for performance to improve.
