What happened
Shares of C3.ai (AI 3.52%) fell nearly 65% in 2022, as the company's revenue growth rate slowed dramatically and investors fled from high-valuation tech stocks. The investment narrative around C3.ai centered on the massive potential of its disruptive technology. Over the past year, it's become clear that investors were expecting too much out of the stock, at least in the short term.
So what
One year ago, C3.ai reported 41% revenue growth for the fiscal quarter that ended in October 2021. In its most recent quarter, that rate had dropped all the way to 7%. That's not high enough to keep growth investors happy, and it's not high enough to support aggressive valuation ratios.
C3.ai also reported a substantial increase in its cash burn rate, which creates additional risk for shareholders. Lackluster financial results have caused Wall Street analysts to comment negatively, casting doubt on the opportunity.
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Disappointing financial results were compounded by difficult stock market conditions. Rising interest rates and fears about global economic weakness are driving major market indexes lower, with growth stocks bearing most of the blow. The Nasdaq, which is heavily exposed to the tech sector, dropped 33% in 2022.
Investors have been forced to revise their short-term forecasts for C3 downward, but it's also become cheaper relative to its underlying fundamentals. The stock's price-to-sales ratio dropped from close to 15 to 4.4 over the course of the year.
AI PS Ratio data by YCharts
Investor risk appetite has drastically changed, while the perceived risk and reward for C3.ai has soured. That's a tough combination for shareholders.
Now what
C3.ai was founded by a strong team, who amassed exceptional talent in product development and engineering. However, the company has struggled with some aspects of sales and gaining market traction. Over the course of a year, the company reorganized its sales force due to poor performance, dealt with scrutiny over the length of its sales cycle, and completely transformed its revenue model.
Last quarter, C3 made a major transition from a software-as-a-service (SaaS) model to a consumption-based one. That will create some uncertainty in the short term, and it will make it more difficult for investors to analyze its progress.
It's not strange that C3.ai is experiencing a rough patch right now. It's navigating some major strategic pivots while dealing with a growth slowdown that's nearly universal across enterprise technology companies. AI-as-a-service is a compelling emerging industry, especially as digital automation becomes more commonplace in every industry. C3 will likely remain a leader in the space due to its early-mover status and product quality. There's still lots of opportunity in this stock.
Nonetheless, the challenges are clear: The global economy isn't supporting high growth for most enterprise software companies right now. High interest rates are leading to low stock valuation ratios. C3.ai is managing against some internal challenges, and it faces stiff competition from some high-profile peers.
None of these factors are likely to be resolved in the short term, so investors shouldn't expect C3.ai to erase its losses within a year. However, the stock could still be a shrewd long-term buy now that it's more reasonably priced.
