The interest in artificial intelligence (AI) has been there for several years, but in November 2022, ChatGPT sparked a revolution in AI that opened numerous possibilities and use cases. ChatGPT, an AI chatbot developed by Open AI, with its versatility, intelligence, and ability to have human-like conversations, contributes to its vast popularity and reach.
ChatGPT had amassed approximately 1 million users in five days and 100 monthly active users just two months into its launch to become the fasting-growing application in history, according to a UBS study. With the viral success of ChatGPT, AI has become a new buzzword on Wall Street, attracting massive investor interest.
Enterprise application software stock C3.ai, Inc. (AI) has been riding on the AI wave and gained 111.6% over the past six months and 279.4% year-to-date to close the last trading session at $42.
C3.ai produces enterprise AI software used by a wide range of industries, such as transportation, healthcare, and manufacturing. On May 30, the company announced that its C3 Generative AI product is available via Amazon’s AWS marketplace. It is already available via Google’s Cloud Marketplace.
Despite AI stock’s impressive price performance, the company’s fundamentals tell a different story. While the software developer’s fourth-quarter results beat analysts’ revenue and earnings estimates, AI offered an annual revenue guidance lighter than the consensus estimate.
AI’s fourth-quarter revenue of $72.40 million was flat compared to the prior-year period, slightly surpassing Wall Street’s estimate of $71 million. The company reported an adjusted loss per share of $0.13, less than the $0.17 loss analysts expected. However, for the full year fiscal 2024, C3.ai predicted revenue in a range of $295 million to $320 million.
On the other hand, analysts had called for revenue growth of 19% year-over-year to $317 million, as per FactSet, meaning the company’s outlook missed revenue estimate at the midpoint.
Furthermore, on April 4, Kerrisdale Capital, which holds a short position in AI stock, sent a letter to the software marker’s auditor Deloitte & Touche LLP, detailing serious accounting irregularities that raise red flags for investors.
C3.ai has “utilized highly aggressive accounting to inflate its income statement metrics in order to meet sell-side analyst estimates for revenue and certain profit metrics, and to conceal significant deterioration in its underlying operations”, Kerrisdale said in the letter.
Here are the factors that could affect AI’s performance in the upcoming months:
Deteriorating Financials
For the fourth quarter that ended April 30, 2023, AI’s total revenue increased marginally year-over-year to $72.41 million. However, its non-GAAP gross profit declined 8% year-over-year to $53.85 million. The company’s non-GAAP loss from operations widened by 13.6% from the prior-year period to $23.54 million.
Furthermore, AI’s non-GAAP net loss was $15.22 million and $0.13 per share, compared to $22.61 million and $0.21 per share, respectively. The company’s cash and cash equivalents stood at $284.83 million as of January 31, 2023, down 16.1% year-over-year.
Mixed Analyst Estimates
Analysts expect AI’s revenue to increase 9.6% year-over-year to $71.60 million for the first quarter that ended July 2023. However, the company’s loss per share for the same period is estimated to worsen by 43.9% year-over-year to $0.17.
In addition, the company’s revenue for the fiscal years 2024 and 2025 are expected to increase 14.6% and 20.9% year-over-year to $305.63 million and $369.42 million, respectively. For the fiscal year 2024, analysts expect AI to report a loss per share of $0.30.
Low Profitability
AI’s trailing-12-month gross profit margin of 67.64% is 39.6% higher than the 48.45% industry average. But the stock’s trailing-12-month EBITDA margin and net income margin of negative 107.01% and negative 100.77% compared to the respective industry averages of 9.03% and 2.08%.
Additionally, AI’s trailing-12-month levered FCF margin of negative 37.83% compared to the 6.97% industry average. The stock’s trailing-12-month ROCE, ROTC, and ROTA of negative 28.02%, negative 18.25%, and negative 24.37% are lower than the industry averages of 0.50%, 1.78%, and 0.02%, respectively.
Stretched Valuation
In terms of forward EV/Sales, AI’s 13.36x is 344.5% higher than the 3.01x industry average. Its forward Price/Sales of 15.89x is 444.4% higher than the 2.92x industry average. Also, the stock’s forward Price/Book multiple of 5.62 is 21.6% higher than the industry average of 4.62.
POWR Ratings Reflect Uncertainty
AI’s weak fundamentals are reflected in its overall F rating, which equates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. AI has a grade D for Value and Quality, in sync with its higher valuation and lower profitability relative to its peers.
Also, the stock has a D grade for Stability, consistent with its 24-month beta of 2.68.
AI is ranked #25 of 26 stocks in the Software - SAAS industry.
Beyond what has been discussed above, additional AI ratings for Growth, Momentum, and Sentiment can be found here.
Bottom Line
C3.ai stock has gained more than 124.5% over the past year, riding the AI wave. Despite the hype around the stock, the business is yet to find its way to profitability. During the fiscal year 2023, the company incurred massive losses and had declining profit margins.
Furthermore, investors and analysts are growing bearish about the AI stock as a short-seller recently alleged accounting issues at the software maker. Also, AI’s full-year fiscal 2024 revenue outlook fell short of analyst estimates.
Given its disappointing financial performance, low profitability, elevated valuation, and dim growth outlook, we think it could be wise to avoid this stock now.
Stocks to Consider Instead of C3.ai, Inc. (AI)
Unfortunately, the odds of AI outperforming in the weeks and months ahead are greatly compromised. However, there are many stocks in the Software - SAAS industry with impressive POWR Ratings. So, you may consider these three A-rated (Strong Buy) or B-rated (Buy) stocks instead:
Splunk Inc. (SPLK)
DocuSign Inc. (DOCU)
Vimeo Inc. (VMEO)
What To Do Next?
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AI shares were trading at $43.11 per share on Tuesday morning, up $1.11 (+2.64%). Year-to-date, AI has gained 285.25%, versus a 20.16% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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