Artificial intelligence (AI) is becoming more prevalent in society as it gets used by more and more businesses. C3.ai (AI 0.09%) is helping promote that by putting enterprise artificial intelligence platforms at its clients' fingertips.
However, C3.ai has had a rough go on the public markets. Since it went public in late 2020, its shares are down more than 83%. Does this make this artificial intelligence company a value trap or an appealing investment trading at a massive discount?
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A unique artificial intelligence play
C3.ai makes enterprise AI more accessible by creating applications for companies and industries that have previously been slow to embrace AI. It has tools for industries ranging from oil and gas to the defense sector. One possible reason businesses in these arenas haven't adopted AI at scale yet is because it's difficult to hire the talent to develop AI engines in-house -- as young people developing AI might prefer to work at a glossy new start-up rather than an oil producer. C3.ai offers those older companies a solution to this challenge.
Largely, it has worked. The company had 228 customers as of the end of its fiscal Q1 (which ended July 31), up 27% year over year. Among them are stable giants such as Shell (SHEL 0.49%) and agencies within the U.S. government.
According to Forrester, C3.ai is a leader in the enterprise AI space, and considering how far the demand for artificial intelligence could soar over the long haul, the company could potentially be much larger a decade from now.
A few things causing C3.ai to slip up
That said, there are many reasons for potential investors to be concerned about this business. First, its growth is slowing dramatically. In its fiscal Q1, revenue increased only 25% on a year-over-year basis, which was a slower rate than it had seen over the prior few quarters. Additionally, management is expecting little additional expansion for the rest of the fiscal year. Its full-year guidance projects a revenue increase of just 1% to 7%, and its fiscal Q2 guidance implies just 3% to 6% revenue growth.
The company is also making a strange pivot: It is moving away from its traditional subscription model to a consumption-based model. While there are benefits and drawbacks to each model, the timing of this is concerning. After all, deciding to operate a subscription or consumption-based business is something a company determines early in its lifecycle, not as a $1.7 billion company -- and especially not after it has operated a subscription service for years.
The last concern is C3.ai's lack of profitability. In its fiscal Q1, it lost $71.9 million -- more than it generated in revenue. Additionally, C3.ai had a free cash flow burn of almost $55 million, giving it a free cash flow burn margin of 84%.
Management noted that it is planning to cut back on expenses to get the company on course to profitability, mainly by slimming down significantly on costs that don't directly impact revenue growth. But if management is talking the talk, the financials aren't backing it up. These problems are getting magnified as revenue slows and expenses continue to soar, and while the company is trying to take steps in the right direction, they might not be the right steps.
Is C3.ai stock a buy now?
With its shares down so much, C3.ai now trades at a rock-bottom valuation -- just 6 times sales. That's historically low for the company and below other AI and data analytics stocks.
That said, it might be wise for investors to stay away from C3.ai for the time being. Its valuation might be cheap, but that's for a reason: The company is in a tough spot right now as adoption of its services is slowing and its expenses continue to rocket higher. While C3.ai has a lucrative opportunity ahead of it, it isn't capitalizing on it. Given the strange decision to shift its pricing model, investors should also be worried about management's clear vision (or lack thereof) for the company.
While C3.ai certainly looks appealing at its current valuation, it's also facing an uncomfortable amount of uncertainty during this strategy shift. It might be wiser to watch this stock from the sidelines.
