The carnage of the ongoing bear market hasn't spared data analytics company C3.ai (AI 3.44%). Shares traded at more than $160 after going public in late 2020 but have fallen 90% to less than $20 per share.
Bear markets can cause share prices to fall across the board, creating opportunities for long-term investors. Usually, companies with solid fundamentals will recover over time.
So is C3.ai a temporarily broken stock, or is there a reason it's this cheap? Here are three concerns investors should consider.
NYSE: AI
Key Data Points
How cheap has C3.ai gotten?
Data has become increasingly important across industries, and helping companies use data is how C3.ai provides value to its customers. C3.ai is a software company that offers artificial intelligence (AI) solutions for enterprises tailored for fraud detection, energy management, customer engagement, anti-money laundering, and more.
The stock's downfall has been violent -- the company's market cap initially soared to more than $15 billion in late 2020 but is just $1.8 billion today. Back out the nearly $1 billion in cash and equivalents on its balance sheet, and the company has an enterprise value of approximately $800 million!
Data by YCharts.
From a price-to-sales standpoint, the current ratio of less than seven is far from the 85 it peaked at in late 2020. Despite the staggering fall for the stock, C3.ai still has plenty of cash to endure the short-term challenges of a bear market. Free cash flow was only negative $14.8 million in its most recent quarter.
While it's great the company is financially stable, there are still some cracks in C3.ai's fundamentals that should concern investors.
Concern: Stock-based compensation
Software companies rely on brilliant employees to build and maintain complex products. Companies in the tech world like C3.ai and Palantir fight for talent among themselves and with larger entities like Apple or Microsoft.
Many of them offer shares of stock as part of an employee's compensation package so they can tie up less cash in large base salaries. While C3.ai burned through just $14.8 million of cash last quarter, you can see how its bottom-line, as measured by net income, is far deeper in the red.
Data by YCharts.
The company spent $35.6 million on stock-based compensation in the quarter ended April 30, the main culprit behind its net loss of $58.4 million. And you can see above how this compensation has risen alongside revenue, so investors will need to monitor this line item to see if and when the company's revenue begins to grow fast enough to outpace stock-based compensation in a meaningful way. Otherwise, it will be challenging for C3.ai to report a GAAP profit.
Concern: Why isn't revenue growing faster?
Artificial intelligence is becoming a massive industry -- C3.ai estimates the worldwide market for AI software could grow to $596 billion by 2025. The company generated $252 million of revenue in its latest fiscal year.
Nobody has to crunch the numbers to see that C3.ai's existing business is a just drop in an ocean of opportunity. In that light, why isn't the business growing faster?
Revenue in fiscal 2022 was up 38%, and management's initial guidance for fiscal 2023 calls for revenue between $308 million and $316 million, good for 25% year-over-year growth at the high end of the range.
CEO Tom Siebel explained on the earnings call that economic and political uncertainty caused the company to take a cautious approach. Stable market conditions could end up producing "30% to 35% steady-state top-line growth" for the company.
That seems like a reasonable approach but forecasting modest growth while touting a massive market opportunity does send mixed signals to investors.
Concern: Too many eggs in too few baskets
More importantly, C3.ai relies on the oil and gas industry for more than half of its business -- about 54% of bookings in fiscal 2022 came from that sector. The company has a big partnership with energy company Baker Hughes, its largest customer. Its top two customers made up 31% of revenue in the fiscal year ended April 30, 2021.
Oil and gas companies are doing very well right now, but energy is a cyclical industry. What happens when the industry faces a downturn? It's possible C3.ai's big customers, like Baker Hughes, decide to focus their spending elsewhere.
It seems that C3.ai's business is more fragile than one might like, which presents a risk investors shouldn't overlook. Without rapid growth to offset the threat from this customer concentration, C3.ai remains a speculative investment despite its lower share price.
