The recent massive price drop of C3.ai (AI 3.02%) stock has raised questions about whether it's too late to invest in the artificial intelligence market. While AI is a promising industry with immense growth potential, C3.ai is an expensive stock even after its gigantic price drops. So let's examine C3.ai's business model and recent changes, and position in the AI market.
Is that steep price drop a warning sign or an invitation to buy C3.ai shares hand over fist?
What is C3.ai?
C3.ai is an AI software company that builds customizable and pre-built AI applications for nine industries, including oil and gas, financial services, and manufacturing. The company initially offered subscriptions to its AI models to companies that lacked AI talent to build cutting-edge AI services. In 2022, the company pivoted from plain subscription fees to a consumption-based revenue model, where clients are only charged when using the products. It's a big change that often leads to slower sales in the short term with the hope of greater gains later on.
The stock has been on a roller coaster since it hit the public market in December 2020. Unfortunately -- or fortunately, if you want to buy shares on the cheap -- the action has gone almost exclusively downhill so far.
C3.ai's stock price fell 77.5% in 2021 and 64.6% in 2022. It's currently down 86% from the all-time highs of the early days. However, C3.ai's stock has also nearly tripled from its 52-week lows today, with a 160% year-to-date gain as of March 31.
Investors don't have much financial data to calculate a fair price for this stock, which goes a long way toward explaining why it has been so volatile.
The company's operating loss in fiscal year 2022 was 78% of revenue, resulting in hugely negative profit margins. Additionally, C3.ai burned through $90.8 million of free cash in 2022, and TTM revenue was $267 million, with a net loss of $262 million. The company's price-to-sales ratio is 11.2, so the stock is still expensive even if you focus on the top-line revenue stream.
C3.ai's army of larger rivals
So the financial platform looks rickety. Still, what if C3.ai has earned its nosebleed-inducing valuation (even after the brutal price drop) due to an inspiring business model?
The AI market is promising and has the potential for massive growth. According to Ark Investment Management, AI could add as much as $200 trillion in output to the global economy by 2030, translating to about $14 trillion in revenue for AI software companies.
However, C3.ai faces heavy competition from larger and better-known rivals, including Amazon (AMZN 3.43%) Web Services, Microsoft (MSFT 1.82%) Azure, and Alphabet's (GOOG 9.96%) (GOOGL 10.22%) Google Cloud. These companies have already partnered with C3.ai and others to improve their services, but C3 needs to differentiate itself from these partners and rivals (Partvals? Riners? You decide!) to gain a competitive edge.
Is the price drop a buying opportunity or a warning sign?
As investors consider whether to buy C3.ai stock, they face the question of whether recent price drops signal a buying opportunity or a warning sign.
C3.ai's shift to a consumption-based revenue model comes with risks, including short-term headwinds as customers scale up usage. However, management believes this strategy will pay off with revenue growth of 30% or more by fiscal 2024. At the same time, the company's heavy reliance on the oil and gas industry is a real risk -- I don't see a bright future for that formerly reliable sector anymore.
And don't forget the challenging list of deep-pocketed head-to-head AI rivals. Whatever wins C3.ai might earn, none of them will come easy.
Yet, if C3.ai can successfully expand its services to a more diverse customer base, it could reduce these risks over time. Ultimately, investors should weigh these factors against their risk tolerance and long-term outlook for the company. You know, like every investment decision you ever make.
Taking stock of C3.ai's future
It's fascinating to see how far AI has come since the late 1990s when I wrote a Roman Chess engine as a special project in college. The branch trees and heuristics of that era aren't even comparable to the increasingly brain-like machine learning systems and large language models (like ChatGPT) we see today. Even so, the 486 PC I worked with couldn't beat you too often but it was pretty great at forcing draws. Success!
Fast forward to today, and AI has become a hugely capable technology with a rapidly evolving business market. However, it's not all fun and games. The AI market also comes with plenty of risks and uncertainties, as we have seen with C3.ai.
When it comes to competition, C3.ai faces some massive rivals. Industry giants like Alphabet, Amazon, and Microsoft already have a formidable presence in the AI market and can also leverage their resources to outcompete C3.ai in various ways.
Moreover, the business landscape is rapidly evolving. While C3.ai looks like a leader in the early innings, the long-term game can turn on a dime. New entrants and disruptors could emerge and upset the balance of power. Hence, investing in C3.ai stock is a bet on the company's ability to stay ahead of the curve and fend off an impressive cast of competitors.
Based on my incredibly outdated personal experience with AI development, I can attest to the stunning development of modern artificial intelligence. Future versions will be even stronger, and the change is not slow. It's powerful stuff and the $14 trillion market size you see bandied about really does make sense.
C3.ai is well-positioned to capture part of a truly massive market. Will the portion be generous enough to support C3.ai's lofty price tag? That question doesn't have an easy answer yet.
It's certainly not too late to invest in C3.ai stock, but it may indeed be too early. There are so many question marks in the air, around the AI market as a whole and around C3.ai in particular. So if you go there, please be cautious and keep your investments small. The unpredictable world of technology can change on a dime, and nothing is certain.
