Very few investors paid attention to the artificial intelligence (AI) platform C3.ai (AI 0.72%) in 2022, as there was little interest in a speculative unprofitable growth company with the Federal Reserve aggressively raising interest rates to combat inflation. As a result, the stock sank 64% last year.
Since the beginning of 2023, investors have become fascinated with the emerging capabilities of AI applications. It only took a short time before C3.ai captured investor attention; the stock is up 113% year to date. However, the company still has unimpressive fundamentals in a market where economic experts debate whether the economy will enter a recession.
Should you invest in C3.ai and potentially get in early on a new exciting technology, or will it only become an ill-conceived fad investment? How will a slowing economy affect its business?
Let's investigate.
It provides enterprises with a complete solution
Today, virtually every company wants to digitally transform. That means integrating technologies that produce, store, or process data into all areas of the business.
Ever since the pandemic made digital transformation an imperative, many enterprises' information technology departments began piecing together custom AI platforms to develop company-specific AI applications. But unfortunately, these science experiments produced less-than-ideal results.
C3.ai is one of the few AI vendors providing an end-to-end platform with everything needed to develop, deploy, and operate large-scale AI applications -- it does the whole enchilada.
Management believes its addressable opportunity is nearly $600 billion, a market it barely penetrates today.
Image source: C3.ai.
One huge reason bullish investors believe C3.ai can monetize the opportunity is that enterprises are shifting away from AI vendors that only provide piecemeal solutions. Instead, they're choosing vendors that provide functional turnkey industry-specific AI applications that clients can use right out of the box -- which is within C3.ai's wheelhouse.
It already has 42 production enterprise AI applications in the market that are utilized by high-profile clients in financial services, utilities, health, manufacturing, defense, intelligence, and other industries.
Image source: C3.ai.
This company has a high long-term upside should it continue to attract quality customers. But, on the other hand, there are dark clouds on the near-term horizon.
The danger of ChatGPT boosting the stock price
Once the company announced its C3 Generative AI Product Suite on Jan. 31, the stock rose 56% in six days.
Behind the stock's boost were numerous investors who were excited that the C3 Generative AI Product Suite could integrate ChatGPT, an app released by OpenAI as an online demo at the end of November 2022. After many people tried the demo, the general public became fascinated with the possibilities of the technology. ChatGPT can understand and respond to text-based queries in a way almost indistinguishable from how a human would reply. As a result, it soon became an internet sensation and the fastest-growing app of all time. Since OpenAI is still private, investors have decided to buy into C3.ai to participate in the frenzy surrounding the new technology.
The problem for C3.ai bulls is that the high upside of ChatGPT comes with substantial risks. First, OpenAI has yet to perfect the technology. It will sometimes generate plausible-sounding but incorrect answers that could cause real-world harm should the response be relied on in mission-critical or health applications. Consequently, investors could quickly flee the stock should this chatbot make a high-profile error.
Second, some brilliant people like Elon Musk, co-founder of OpenAI, have called for its regulation, and at least one member of Congress is already pushing to regulate AI. But, of course, investors always needed to be aware of the risk that government regulation could slow the adoption and monetization of the technology.
So, despite the hype, it could take much longer for OpenAI and other companies experimenting with ChatGPT clones to profit from the technology. Once Wall Street figures that out, the bubble that sent C3.ai's stock soaring could burst.
A recession would be bad for the company
C3.ai's fiscal second-quarter 2023 earnings showed that quarterly year-over-year revenue growth is decelerating; it is unprofitable and has negative free cash flow.
AI Revenue (Quarterly YoY Growth) data by YCharts
C3.ai uses a consumption-based pricing model, which often does terribly in downturns as customers frequently consume less to cut spending during downturns. Considering that the economy could enter a recession in 2023, its fundamentals could deteriorate much further and quickly end any rally in the stock.
If you are investing cautiously during this downturn, you should probably sell this stock given that it has risen so fast based on the hype of ChatGPT, especially considering the risks of a recession.
