Artificial intelligence is poised to be a major technological breakthrough, revolutionizing sectors such as healthcare and industrials. One of the companies that has seen significant interest in this realm is C3.ai (NYSE:AI), a company specializing in AI software development. Growing interest from a range of sectors has led the company’s valuation to explode. However, down considerably from its 52-week high, many investors are now trying to gauge if it’s a good time to step into this AI stock.
I’m still not 100% sold one way or the other on this company, to be honest. On the one hand, I think there’s certainly good reason why the market and many investors are very bullish on this name. On the other hand, valuation matters, and this is a stock that’s far from dirt-cheap.
With that said, let’s dive into what investors may want to consider when it comes to C3.ai right now.
AI Fundamentals
C3.ai’s recent financial performance weighed down its stock. After reporting Q1 results in early September, the company experienced a stock drop. It achieved $72.4 million in sales, meeting its guidance, with a reduced loss of 9 cents per share. Subscription revenue made up 85% of total revenue, but it ended the quarter with negative free cash flow of $8.9 million.
C3.ai anticipated Q2 sales between $72 million and $76.5 million, implying 19% growth at the midpoint. However, the goal of achieving profitability by April 2024 was dropped in favor of more generative AI investments, which was questioned by JPMorgan analyst Pinjalim Bora. While the stock had seen a remarkable 180% increase earlier in the year, it has declined in recent weeks.
What’s Going Right for C3.ai
C3’s financials for Q1 of fiscal year 2024 showed no long-term debt and $751 million in cash equivalents. While it consumed about $141 million in free cash over the past year, this is typical for high-growth tech companies, often used for marketing and research.
C3.ai’s cash burn rate has improved, providing several years of runway without requiring more financing. Sales are increasing, and cash burn is decreasing. With continued success, the company could turn profitable without emergency fundraising. C3.ai is an AI expert poised for future growth in the business-class AI tools market.
Amid growing global interest in machine learning and generative AI, C3 is well-positioned to tap into a surge in AI research. Increased interest in AI education provides access to talented engineers. While others benefit from AI expertise, C3’s extensive experience sets it apart. This positions C3.ai for continued growth.
But Take Caution
The tech industry is now filled with AI specialists, both veterans and newcomers. C3.ai currently leads its niche, but the competitive landscape is evolving. Just as generative AI and large language models gained prominence rapidly, the tech landscape could shift again. Is C3.ai prepared for the next IT transformation? I say, not really.
Besides these issues, C3.ai’s stock valuation is sky-high. Being unprofitable makes metrics like price to earnings or price to free cash flow irrelevant. C3.ai’s stock trades at 10.2-times trailing sales, while most of the company’s peers have much lower price-to-sales ratios. Even after a 45% price drop, C3.ai’s stock may have surged too quickly, with its AI-related growth already baked in.
This Stock Is Probably a Hold
Considering the uncertainties and high cost associated with building a position in C3.ai, there’s no clear buy signal I can take away from diving into this stock. Certainly, a lower price point may be much more attractive for those who are extremely bullish on the rise of AI. And perhaps valuations in this sector will simply continue to balloon – it’s a possibility.
That said, I think now’s the time to be level-headed about this space, and the prospects of even the best names within AI. C3.ai may have everything long-term growth investors want, but if it’s growth prospects are fully captured by its stock price (and then some), there’s not going to be much of a long-term return down the road. We’ll have to see how the company performs in its upcoming earnings reports to see if there’s more untapped growth to be considered. It’s possible, and I’m leaving my mind open to that possibility right now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.