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Companies operating in the artificial intelligence (AI) space have experienced a rapid upswing in share prices this year. The launch of ChatGPT, which is the flagship offering of Open AI and a slew of other AI-powered solutions, has driven investor optimism higher in recent months.
While the tech-heavy Nasdaq Composite Index ($IUXX) is up 22% year-to-date, AI stocks such as NVIDIA (NVDA) have more than doubled in market value in 2023. In fact, NVIDIA stock surged almost 25% yesterday after the semiconductor giant surpassed consensus revenue estimates for fiscal Q2 of 2024 (ending in July) by a whopping 52%. Share prices of other tech giants that aim to gain traction in AI, such as Microsoft (MSFT), Meta (META), and Alphabet (GOOGL), are also up 36%, 103%, and 38.5%, respectively, this year.
Next Move Strategy Consulting projects the artificial intelligence market to be valued at almost $2 trillion by the end of 2030, up from just $100 billion in 2021, providing companies with enough room to drive sales higher. Moreover, a report from Goldman Sachs (GS) estimates AI-based tech to positively impact the profits of companies part of the S&P 500 by 30% in the next decade.
Another popular AI stock is C3.ai (AI), currently valued at a market cap of $3.18 billion. Down 84% from all-time highs, shares of C3.ai have also gained 157% this year, significantly outpacing the broader markets. But is this stock a buy right now?
What does C3.ai do?
C3.ai is an enterprise-facing AI application software company that aims to offer an integrated portfolio of solutions. These offerings include the C3 AI Application Platform, which is an end-to-end platform that deploys and operates enterprise AI applications. Further, its solutions are also focused on accelerating the digital transformation journeys of clients. So, enterprises can leverage C3.ai’s solutions to develop, deploy and operate large-scale AI applications across public, private, and hybrid cloud infrastructures.
C3.ai went public via an initial public offering in December 2020. The AI stock then touched an all-time high of $183.90 less than 2 weeks later to bullish investor sentiment. However, concerns over its valuation, a sluggish macro economy, rising interest rates, and the significant pullback in tech stocks dragged C3.ai stock to a record low of $10.16 in January 2023.
Should you buy C3.ai stock right now?
C3.ai has increased sales from $156.6 million in fiscal 2020 (ending in April) to $252.7 million in fiscal 2022.
While its gross margins are over 70%, similar to several other tech stocks, C3.ai continues to sacrifice the bottom line for revenue growth. In the last 12 months, its sales have increased to $266.7 billion. However, research and development expenses stood at $207 million, while operating expenses were higher at $254 million.
The company ended fiscal Q3 with $772 million in cash, providing it with some room to support its cash burn rates, given free cash outflow in the last 12 months was just over $112 million.
An upcoming driver of the AI stock will be its earnings for fiscal Q4 of 2023, slated for May 31st. C3.ai expects to report sales between $72.1 million and $72.4 million in Q4, higher than its previous guidance of $71 million. It suggests sales will jump 5.6% year over year to $266.6 million in fiscal 2023.
C3.ai also expects operating losses between $23.7 million and $23.9 million in Q4, lower than the previous estimates of losses between $24 million and $28 million. Improved guidance sent shares of C3.ai stock higher by 23% in a single trading session last week.
The consensus earnings forecast for Q4 is -$0.66 per share, compared to -$0.55 per share in the year-ago quarter. This massive deceleration in revenue growth and widening losses resulted in the decline of C3.ai stock in 2022.
Is Now a Good time to Scoop Up Shares of C3.ai?
C3.ai is well poised to benefit from a first-mover advantage in the AI vertical. It has emphasized enterprise interest in predictive analytics solutions has been robust, providing a sound business environment for the company.
It closed 43 deals in Q4, including 19 pilots initiated in the quarter. The company also claimed, “The number of qualified enterprise opportunities for closure within 12 months in our sales pipeline has increased by over 100% in the past year.” Additionally, C3.ai projects its total addressable market at $600 billion, which is quite substantial given its sales were less than $300 million in the last year.
However, priced at 10x fiscal 2024 sales, C3.ai stock trades at a premium. The rapidly expanding addressable market and the hype surrounding AI has allowed C3.ai to have a sky-high valuation. While its short volume has fallen somewhat in the last month, its short-interest ratio remains high at a sky-high 29%. A short interest ratio indicates the percentage of outstanding shares held by short-sellers.
Out of 11 Wall Street analysts covering the stock, only 2 of them have a Strong Buy rating on C3.ai, 6 of them have a Hold rating, and the 3 others are bearish:
Within the past 2 weeks, an analyst from Piper Sandler reiterated his Hold rating, with a price target of $23.00, and an analyst at Bank of America Securities maintained his Sell rating and set a price target of $16.00.
My opinion is that C3.ai is too risky to invest in right now. After NVDA's recent performance, investors are clamoring to buy AI stocks but that doesn't mean that C3.ai's stock is currently a wise invest. It has a very high valuation and continues to lose money. Though we could send a tremendous short squeeze if it exceeds earnings forecast next week, I will be staying on the sidelines for now.
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