C3.ai (AI -0.91%) stock has seen volatile trading on the heels of a public letter published by a short-seller addressing the artificial intelligence (AI) company's financial auditors. Following allegations concerning the software and services provider's accounting practices, its share price has fallen roughly 32% in April so far. On the other hand, the company's stock has benefited from surging excitement surrounding AI in 2023, and its share price is still up roughly 104% year to date.
Should investors be buying the stock on the heels of its recent valuation pullback, or is there still too much downside risk here? Read on for a look at bullish and bearish dynamics that could shape how the stock performs over the next year and beyond.
Bearish: Lofty valuation and limited business visibility
In its letter to C3.ai's auditors, Kerrisdale Capital highlighted turnover in the AI software and services company's CFO as potentially worrying and raised questions about the company's accounting practices with regard to revenue, unbilled receivables, and gross margins.
C3.ai has since published a response letter addressing some of the concerns raised by Kerrisdale. Still, some questions about gross margins and other issues will need to be addressed with future earnings reports, and there's some uncertainty as to how much of a catalyst emerging AI technologies will actually be for the business.
It seems like C3.ai stock's big gains this year have been aided by interest surrounding OpenAI's ChatGPT and the $10 billion investment the technology attracted from Microsoft. C3.ai is already providing AI-powered software and services, and it's rolling out a generative AI product for enterprise search this spring.
But CEO Tom Siebel said in the company's last earnings call that the company had not figured out how to monetize its new search product yet. It's unclear whether the AI-driven valuation hype for the business is justified. And while C3.ai stock has seen a precipitous pullback following Kerrisdale's critical letter, the company still trades at lofty multiples.
AI PS Ratio (Forward) data by YCharts. PS Ratio = price-to-sales ratio.
With midpoint guidance calling for roughly $265 million in revenue in the current fiscal year, management expects to grow revenue by roughly 5% and post a non-generally accepted accounting principle (GAAP) (adjusted) operating loss of roughly $71 million in fiscal 2023.
The company shifted to a consumption-based billing model this year and has seen sales headwinds associated with the transition. It seemingly has a significant amount of revenue still waiting in the wings to be realized, but its highly growth-dependent valuation appears out of step with recent business performance.
Bullish: AI is red-hot, and C3.ai's sales growth could accelerate
Kerrisdale Capital's letter to auditors raised concerns about the company racking up unbilled receivables from its largest customer, Baker Hughes, while revenue actually fell year over year in Q3 and is projected to fall slightly in Q4. On the other hand, Baker Hughes has a strong reputation and is a highly trusted name in the oilfield services space, and C3.ai is correct in stating that many companies in the software space carry unbilled receivables.
With the company carrying out remaining performance obligations and beginning to realize some of its unbilled receivables, it looks like sales could climb significantly in the next fiscal year. Management is guiding for revenue to grow roughly 30% in its 2024 fiscal year starting in May, and it anticipates shifting into profitability on an adjusted basis in the year.
C3.ai ended its last quarter with nearly $790 million in cash and equivalents, so it's well capitalized enough to withstand some growing pains and shouldn't need to turn to new share offerings to fund operations anytime soon.
With a market cap of roughly $2.6 billion, the company is still small enough to deliver explosive returns if it gains ground in AI software and services. Depending on how the company's new AI products and features turn out, C3.ai could emerge as a big winner in the artificial intelligence revolution.
Is C3.ai stock a buy?
While I certainly wouldn't short C3.ai stock, ultimately, I don't see enough to justify an investment in the software and services player right now. Even in the context of high-risk, high-reward companies in the AI space, the company's valuation profile and somewhat uncertain business outlook make this a speculative play. It's entirely possible that C3.ai will go on to prove doubters wrong, but for now, I think there are better bets available for investors seeking potentially explosive AI investments.
