Investing in artificial intelligence stocks has produced impressive gains on a year-to-date basis. Indeed, C3.ai (NYSE:AI) is one such stock that’s produced outsized returns for investments this year. Accordingly, for many momentum investors, this is the stock to own.
However, at some point, investors may question this sector’s growth trajectory or the valuations of companies benefiting from this trend. In all honestly, no investor truly knows for sure how fast this space will grow in the coming years. That’s where the volatility comes into play, as investors price in how fast revenues will grow and earnings will follow.
In the case of C3.ai, the picture is perhaps murkier than many other AI-related stocks. The company has positioned itself as a standout enterprise AI software company. However, the recent impressive share price appreciation (AI stock quadrupled in January and late summer 2023) has led to growing valuation concerns. Additionally, C3.ai withdrew its prediction of achieving non-GAAP profitability by year-end and projected a larger annual loss.
With no earnings, the price-to-sales ratio indicates it’s among the most overvalued stocks, surpassing 90% of its peers. Let’s investigate whether this stock is still a buy based on these recent developments or if investors want to stand pat.
There Are Other Other AI Options
This year, C3.ai gained prominence in the AI investment surge, becoming a top result for “AI stock” searches. However, the company’s frequent focus shifts, including energy optimization to IoT and AI, raise concerns about its stability and strategic direction.
The recurrent shifts in C3.ai’s focus raise doubts about its long-term strategy, prompting concerns about potential pivots with emerging tech trends. Another red flag is its heavy reliance on a single customer, constituting 35% of FY 2023 revenue. This customer concentration poses a significant risk, akin to having all eggs in one basket, making the company vulnerable to industry downturns.
Latest Job Cuts
Despite significant growth, C3.ai faced layoffs due to the necessity for cost savings, marking a shift in its trajectory. The stock, up over 180% year-to-date, faced challenges, prompting the company to prioritize expense reduction for a potential turnaround in 2024. The layoffs raise questions for investors.
Details about the C3.ai layoffs remain undisclosed, causing market concern. Share prices abruptly dropped 4.3%, and the extent of the cuts, seemingly performance-related, is unclear. Similar cuts occurred six months ago, and the company had 914 employees as of April.
C3.ai’s expansion of its Amazon (NASDAQ:AMZN) partnership for AI solutions with AWS precedes the layoff announcement. While layoffs don’t necessarily signal trouble, concerns arise for C3.ai’s future despite potential 2024 stock improvements.
Too Much Cash Burn
Despite being an AI-focused company, C3.ai’s growth in Q1 FY 2024 was modest at 11%, reaching $72.4 million. Its substantial operational loss of $74 million raises concerns, reflecting a 102% operating loss margin. While the company holds around $750 million in cash and short-term investments, its profitability remains a major red flag.
If the company can’t turn its cash burn or margins around within the next year, investors may start to question the company’s valuation. In my view, this is the crux of the issue with this stock right now.
AI Stock: Bottom Line
Overall, C3.ai’s substantial challenges, including slow growth, a considerable distance from profitability, and the fact that the market values it at nearly 12 times sales, are somewhat of a concern to me. This is simply a premium I’m unwilling to pay. Many may suggest the stock’s surge of over 150% is attributed more to AI hype than genuine business understanding. While I won’t go that far (as this is really a great pure-play in the space), it’s also true that there are alternatives to investors looking to play the artificial intelligence revolution.
Thus, I don’t think AI stock is a screaming buy in the short term, but watching it over the long run can be worthwhile.
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.