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Artificial intelligence (AI) stocks have been on an absolute tear in 2023. The launch of ChatGPT and multiple other AI-powered platforms has fueled significant investor optimism, as reflected by growth forecasts for the industry. Precedence Research estimates the total addressable market for AI to surpass $2.57 trillion by 2032, indicating an annual growth rate of almost 20% over the next nine years.
Backed by the extremely bullish sentiment surrounding AI stocks, shares of C3.ai (AI) have surged 163% in 2023, valuing the company at $3.42 billion by market cap. Let’s see if this high-flying tech stock is still a good buy at current multiples.
Is C3.ai Stock a Good Buy Right Now?
C3.ai is an enterprise-facing AI application software company, focused on accelerating the digital transformation of companies by leveraging its expertise in AI. It offers an integrated product portfolio, which includes:
- C3 AI: An end-to-end platform to develop, deploy, and operate enterprise AI applications.
- C3 AI Applications: A portfolio of industry-specific SaaS enterprise AI applications, enabling the digital transformation of global organizations.
- C3 Generative AI: A suite of generative AI offerings.
The company has increased its sales from $156.6 million in fiscal 2020 (ending in April) to $266.8 million in fiscal 2023. Similar to other high-growth tech companies, C3.ai remains unprofitable, and reported an operating loss of $290 million in fiscal 2023.
C3.ai said the introduction of ChatGPT and generative AI in late 2022 has accelerated the use of AI technologies in business processes, which has supported its enterprise growth. In a letter to shareholders, CEO Thomas Siebel wrote, “We believe that Enterprise AI is a mega-market event… It is difficult to overestimate the reception that we are receiving to our Generative AI solution. The market interest levels are intense, the sales cycles are short, the benefits are immediate, and the expansion opportunities within the enterprise are vast.”
The company currently offers more than 40 turnkey production AI applications that can be installed to address predictive supply chain optimization, fraud detection, contested logistics, and more. Moreover, it expects to build a unified enterprise search model by using the capabilities of large language models (LLMs) as the company aims to replace applications such as customer relationship management and enterprise resource planning.
How Did C3.ai Perform in Fiscal Q1 of 2024?
In fiscal Q1 of 2024 (ended in July), C3.ai reported revenue of $72.4 million, which was near the high end of its guidance. Subscription sales totaled $61.4 million, accounting for 85% of total sales.
It ended the quarter with an adjusted gross margin of 69% and $334.6 million in remaining performance obligations, providing shareholders with visibility in terms of top-line growth. C3.ai remains unprofitable, and reported an adjusted loss per share of $0.09 in Q2 - which was narrower than expected.
The company also reported an operating cash flow of $3.9 million and a free cash outflow of $8.9 million. It ended Q1 with a cash balance of $809.6 million, a decline of $2.8 million sequentially. It's evident the company has enough liquidity to support its cash burn rates in the near term, and improve profit margins in the next two years.
In fact, C3.ai stated it expects to report positive cash flows consistently in fiscal 2025, despite heavily investing in marketing, lead generation, and branding over the next 12 months.
What Is the Target Price for AI Stock?
Out of the 14 analysts covering C3.ai stock, three recommend “strong buy,” seven recommend “hold,” two recommend “moderate sell,” and two recommend “strong sell.” The average target price for AI is $27.25 - implying expected downside of about 7% over the next 12 months.
Notably, analysts expect C3.ai to increase revenue by 15.4% to $308 million in fiscal 2024 and by 20% to $369 million in fiscal 2025. Priced at 10x forward sales, AI stock trades at a premium, given its negative profit margins.
