Investors are on a seemingly endless chase, looking for the next big thing. Artificial intelligence (AI) appears to be Wall Street's hottest topic in 2023. As technology's most prominent companies embrace AI, investors scramble for exposure, buying up several artificial intelligence stocks.
Count AI software company C3.ai (AI 0.72%) among them; shares are up roughly 130% over the past month alone. But knowing the difference between emotionally driven price movement and price action driven by solid fundamentals is an important distinction. Below, I'll show you which category C3.ai falls into.
Narrowing down what C3.ai does
Artificial intelligence is a pretty ambiguous term for as hot a topic as it's become; different AI companies do different things. It seems the most common use for AI today is to digest data better and analyze it to improve decision making in organizations. C3.ai offers a range of AI-powered software applications for enterprises and governments.
For example, enterprises can use several of C3.ai's supply chain suite applications to optimize inventory, sourcing, or scheduling. Applications in the public sector suite can increase building appraisal accuracy or maximize tax revenue. The defense and intelligence suite has applications to analyze intelligence data and provide AI insights to aid decision-making.
C3.ai has a three-phase sales cycle that ends with a ramp-up period once the software is successfully implemented and running. Data is arguably everywhere and in nearly all industries; thus, there is a vast market opportunity for AI. C3.ai's management estimates its total addressable market will be worth $596 billion by 2025.
Do the fundamentals justify the share price?
It's a great story, but it won't translate to long-term investment returns without strong operating performance. C3.ai has some significant concerns right now; you can see in the chart below that revenue growth dramatically slowed over the past year while cash losses accelerated. C3.ai generated $270 million in revenue over the past four quarters, so burning through $202 million isn't good -- especially considering the company issued $180 million more in stock-based compensation.
AI Revenue (Quarterly YoY Growth) data by YCharts
A couple of quarters ago, management announced an overhaul of its sales staff and a transition to usage-based billing. It believes the new billing model will help growth in the long run but will hurt short-term revenue growth. In other words, new customer deals might not add much to the company until it hits that ramp-up phase later on. C3.ai is also targeting profitability, with a goal of positive cash flow by the end of fiscal year 2024, six quarters from now.
What should investors do?
Better growth and turning profitable are noble goals, but management must show results to back them up over the next 18 months. Whether by design or not, C3.ai's current fundamentals seem flimsy, and it's hard to imagine the recent run on the stock being justified. Instead, it appears that a stock with the literal ticker symbol AI has gotten hot due to the hype that artificial intelligence has across the market.
That's not to say that C3.ai won't succeed, but there is more to lose by chasing the stock now than simply waiting for revenue growth and cash losses to improve before jumping in with both feet. If the potential market opportunity is hundreds of billions of dollars, growth shouldn't be that hard since the company's revenue was only $270 million over the past year.
Investors looking to own the stock now should use a dollar-cost averaging strategy to build a position slowly. Otherwise, waiting a few quarters for better operating results could be smarter.
