There has been lots of excitement surrounding artificial intelligence (AI) this year. And one stock that can stand to benefit a lot is C3.ai (AI 3.84%), which -- as its ticker symbol suggests -- is big on AI and provides services relating to it. If you're thinking of investing in the stock, there are three things you'll definitely love about C3.ai -- and one thing you probably won't.
1. The company's cash position is strong
A big risk with companies in their early growth stages is that they're often burning through cash, which can lead to stock offerings and dilution. And cash burn is a problem that C3.ai has been dealing with: Over the trailing 12 months, operating cash burn has been just under $156 million.
But the company is in a good financial position and able to absorb that type of cash burn for multiple years. As of the end of January, cash and short-term investments totaled more than $772 million. And management is optimistic that by the end of fiscal 2024 (its year ends in April, so we're talking about the spring of 2024), its operations will be cash-flow positive.
This should give investors some confidence that the risk for dilution is low for C3.ai, making it easier to justify investing in the business right now.
2. There's a big addressable market
AI can help transform and improve many industries. CEO Tom Siebel believes that the addressable software market for AI could top $600 billion.
And analysts from Fortune Business Insights project that by 2029, the entire AI market could be worth just under $1.4 trillion, and that it will be expanding at a compound annual rate of more than 20% until then. While software is the largest component of the AI market, hardware and services also present key growth opportunities for the industry.
All that potential means that C3.ai won't run out of opportunities to get bigger and more diverse in the future.
3. The company's gross margins are great
Another positive about C3.ai's business is that its gross margins are high. Even though they have come down a bit as subscription-related expenses have been rising, at 66%, that puts C3.ai in great shape to cover its costs as it grows.
AI gross profit margin (quarterly) data by YCharts.
Software and other tech companies normally enjoy strong margins, and that's what enables businesses such as Meta Platforms and Alphabet to become highly profitable. Over time, as they have expanded and required less overhead, their operations became much more profitable, thanks in large part to strong gross margins.
C3.ai is a long way from that point, but if it can maintain margins of 65% and better (Alphabet's gross margin is much lower at around 54%), that can help set it up for success down the road.
The 1 big negative might be the valuation
The main thing investors might not love about C3.ai's stock right now is its valuation. The price has been jumping this year as the ChatGPT hype has helped accelerate its gains. At nearly 13 times revenue, its valuation is a bit rich and much higher than where shares of C3.ai have been on average over the past year.
AI PS ratio data by YCharts.
Analysts also appear to think that the stock might be punching above its weight class. The consensus analyst price target is just over $20, suggesting that the stock has a downside risk of around 40% from where it trades today.
Is C3.ai a buy?
There are many encouraging things about C3.ai, including the huge AI market it can tap into. If the company can be cash-flow positive, that will reduce the risk of owning the stock, since it could pave the way to eventual profitability. Over the past four quarters, the company has incurred losses totaling $262 million (on revenue of $267 million).
There's still some risk with C3.ai, but if you're willing to buy and hold for years as the AI market expands, this could make for a worthwhile investment.
