Artificial Intelligence (AI) technology could become one of the greatest megatrends of our time. And C3.ai (AI -0.85%) stock gives investors a chance to get in on the ground floor of this opportunity. But with its share price more than doubling in less than three months, is it too late to bet on the company? Let's dig deeper to find out.
What is C3.ai?
Going public through an initial public offering (IPO) in 2020, C3.ai is an AI software company providing enterprise-level data and analytics in various industries. For example, an oil company might use one of its machine learning solutions to maximize well efficiency, while a financial services company could use its tools to detect fraud. The magic of this technology is that it becomes "smarter" as it works with more data.
C3.ai boasts a portfolio of well-known enterprise clients, including Royal Dutch Shell, which uses its software to maintain more than 10,000 pieces of gas assets, and the U.S. Air Force, which uses it to maintain readiness for some of its cutting-edge aircraft.
C3.ai believes the total addressable market for AI software will reach a whopping $596 billion by 2025. And while the company's operations are currently small, they are growing fast -- with fiscal 2022 sales jumping 38% year over year to $252.8 million.
What are some of the risks?
With the launch of the generative AI platform ChatGPT, investors have become hugely optimistic about the progress in this field, leading C3.ai's stock price to skyrocket 106% year to date. But consumer-facing chatbots are different from enterprise software, which raises the question of whether C3.ai's stock price is booming from a hype cycle that won't lend it any fundamental benefits.
Uncertainty about C3.ai intensified after short-seller Kerrisdale Capital wrote a letter to the company's auditors, highlighting concerns about possible accounting disclosure issues. While it is too early for the public to know whether these accusations have merit, C3.ai's loss-making operations are another cause for concern, which isn't very hard to see.
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In 2022, the company's operating loss ballooned from $60.3 million to $196.1 million, an increase of over 200%, due to surging spending in areas like marketing and research and development as it seeks to scale up its operations. With almost a billion in cash and equivalents, C3.ai probably won't run out of money in the near term. But loss-making companies tend to underperform when interest rates are high because it increases the cost of capital they need to maintain operations.
Is C3.ai a buy?
With a price-to-sales (P/S) multiple of 9.3, C3.ai trades at a significant premium to the S&P 500 average of 2.3. While its respectable growth rate helps explain some of this premium, the high valuation can lead to downside risk if the company doesn't live up to hype-fueled expectations.
As an enterprise software company, C3.ai doesn't look likely to benefit much from the boom in consumer-facing generative AI platforms like ChatGPT because these are different technologies. Further, the yet unsubstantiated allegations of accounting irregularities add another layer of uncertainty to the company.
Investors may want to wait for more quarters of data before taking a position in the stock.
