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Many stocks operating in the artificial intelligence (AI) space have had a remarkable run in 2023, thanks to both increased adoption of the technology and optimistic forecasts about future use cases. ChatGPT backer Microsoft (MSFT) is up 41% year-to-date (YTD), while Google (GOOGL) - whose generative AI platform competes with ChatGPT - is up 48.8% YTD. Elsewhere, Nvidia's (NVDA) impressive AI-fueled rally of 226% YTD has been one of the highlights of the industry this year, as it became only the seventh U.S. company to cross the $1 trillion market cap milestone.
However, one relatively small AI stock has outperformed all of these tech giants in terms of share price performance. Shares of C3.ai (AI) have gained an incredible 255.3% in 2023, driven by positive buzz around the continued and growing implementation of AI-enabled solutions among businesses.
That said, AI has retreated by 22% since touching a 52-week high of $48.87 in mid-June.
So what's next for C3.ai? Will is be able to reclaim its 52 week highs?
To answer these questions, let's take a look at what's led to the stark rise in C3.ai so far in 2023 - and how the current valuation stacks up against both not only the company's own fundamentals, but those of its its AI rivals.
About C3.ai
Before we delve into the “why” behind the rally in C3.ai stock, let's have a look at what C3.ai is all about, and how they factor into the suddenly hot artificial intelligence industry.
C3.ai is an enterprise AI application software company, founded in 2009 by Thomas Siebel, a tech billionaire who sold his Siebel Systems software company to Oracle (ORCL) in 2006. The California-based firm offers an entire suite of AI solutions for businesses, ranging from an AI application platform to an industry-specific AI SaaS solution - and even a generative AI platform catering to enterprises.
In terms of size, C3.ai is comfortably in the mid-cap category with a market cap of $4.6 billion.
Why C3.ai Rallied in 2023
A key contributor to the rally in C3.ai stock has been the rapidly rising prevalence and application of AI-enabled solutions in enterprises. This happens to be the core focus of C3.ai - offering software-based AI solutions for enterprises to increase productivity and hence their profitability.
Looking at the AI industry as a whole, the sudden boom in AI adoption this year appears to be just the beginning, based on forecasts. With over 84% of executives looking to leverage this technology, the market is expected to reach over $190 billion by 2025, and contribute $15.7 trillion to global gross domestic product (GDP) by 2030.
As for C3.ai specifically, the stock's rise has also been supported by a strategic move made at the end of last year. In December 2022, C3.ai changed its pricing model from subscription-based to consumption-based, on par with industry standards. The consumption-based model works on the formula that the higher the consumption, the costlier the service. As adoption and usage expands, this move by C3.ai could prove to be a smart one.
Muted Fundamentals
While the optimism around artificial intelligence has helped propel the stock to new heights, C3.ai hasn't generated as much excitement with its core fundamentals in recent quarters.
In its fiscal fourth-quarter results, C3.ai reported total revenues of $72.4 million, nearly flat from the previous year's $72.3 million. Further, the company's losses widened in Q4 to $0.58 per share from $0.55 per share.
Moreover, during the last eight quarters, C3.ai's revenues from its core subscription business rose from $46.1 million in July 2021 to $56.9 million in April 2023. This represents an increase of about 23% over a time period of two years. Plus, C3.ai's losses almost doubled over the same period, from $37.5 million to roughly $65 million. Notably, during about the same time frame, the size of the broader AI market more than doubled, according to Statista.
However, some potential green shoots were visible in the results. In the fourth quarter, the company generated a positive free cash flow of $16.3 million, compared to an outflow of $14.7 million in the prior year. And in each of the past five quarters, the company's loss per share has come in narrower than the consensus estimate.
Encouragingly, according to C3.ai's latest SEC filings, the company is debt-free, with zero long-term debt on its books.
Further, the company has a diversified customer base. In FY23, its bookings came from a disparate group of industries, with Oil & Gas (33.8%), Federal, Defense & Aerospace (28.9%), Tech (13.2%) and Manufacturing (4.2%) among its top customers.
Relative Valuation Against AI Software Stocks
After the stellar rally in AI this year, there are some mixed signals on AI's valuation compared to its peers.
For starters, C3.ai stock is trading at a steep price-to-sales (p/s) ratio of 16.56, which is much higher than Alteryx (AYX) at 3.15, as well as IBM (IBM) at 2.15.
However, a much tamer - and even more favorable - valuation is reflected in the price-to-book (p/b) ratio for C3.ai. The current reading of 4.61 is lower than IBM's at 5.85, and considerably cooler than AYX's 21.50.
Analyst Estimates
Analysts are quite upbeat about C3.ai when it comes to earnings for the next quarter, as well as for FY24. Analysts have predicted earnings growth of 9.52% for its next quarterly results, and overall improvement of 12.65% is projected for FY24.
Meanwhile, most analysts covering the stock have a “Hold” rating, with a mean target price of $27.18 - indicating downside potential of about 31.6% from current levels. Out of 14 analysts covering the stock, 2 have a “Strong Buy” rating, 8 have a “Hold” rating, 2 have a “Moderate Sell” rating, and 2 have a “Strong Sell” rating.
Final Takeaway
At its core, the rally in C3.ai stock appears to be a bet on the future. Near-term projections for the AI space in general and its applications for enterprise appear to be quite optimistic, with large scope for growth. Consequently, C3.ai's leading position in the AI-enabled enterprise solutions space gives the company solid ground to benefit from wider adoption.
Moreover, the company's valuations also appear to be at reasonable levels compared to its peers, even after the remarkable rally.
However, as highlighted above, the company has failed to impress investors by reporting wider losses and flat top-line growth. C3.ai needs to address its profitability and revenue issues effectively, and as soon as possible, to help sustain the strength in its share price.
That said, a debt-free balance sheet in the current high-interest rate scenario is arguably a plus. Unlike companies saddled by burdensome interest payments, C3.ai will have some wiggle room to raise debt in the future to invest in its operations and growth.
All in all, I remain of the opinion that investors who have been a part of this rally should book partial profits in the stock now. Avoid adding new positions at current levels. However, for long-term investors who are looking to gain exposure to the enterprise-led AI solutions space, C3.ai stock can be a prudent addition to portfolios once earnings and revenue begin to deliver more consistently.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
