A company's name can significantly affect the public's perception of the business. For example, C3.ai (AI -0.72%) clearly has artificial intelligence in its name, indicating that its products somehow have AI integrated into them.
With how popular AI-centric investing is becoming, it's been nothing but a boost for C3.ai's stock. But is there an investible company behind this name? Or should investors avoid the hype? Let's find out.
C3.ai has a relatively small client base
C3.ai makes plug-in AI applications for clients in many different industries. Whether it's the U.S. Air Force or Shell, these entities have chosen it as their primary partner. While the company has products in multiple industries, including manufacturing, defense, financial services, and healthcare, most of its business comes from oil and gas.
In the 2023 third quarter (ended Jan. 31), 72% of bookings came from the oil and gas industry. However, in the fourth quarter, its defense sector made up 43% of bookings. That's because C3.ai received three orders from its five-year, $500 million-contract from the Department of Defense.
For reference, C3.ai generated $267 million in revenue for all of fiscal 2023. Because it is a young and relatively small company, single customers can potentially make or break the business.
This chink in its armor was pointed out by short-seller Kerrisdale Capital when it noted that oil and gas giant Baker Hughes (NASDAQ: BKR) makes up a significant portion of its revenue stream. Furthermore, Kerrisdale claimed the relationship was deteriorating. C3.ai responded that its relationship with Baker Hughes is out in the open for investors to assess.
With this potential risk looming, is the stock worth investing in today?
The company is very unprofitable
With C3.ai's revenue shrinking in the fourth quarter of 2023 (ended April 30), investors might be confused since it is supposed to be a growth company. But this drop is misleading, because management switched to a consumption-based model instead of a subscription one during the first quarter. This caused poor year-over-year comparisons, which made it seem like growth was nonexistent (which is valid at the surface level).
By looking at C3.ai's guidance, investors can see demand is still prevalent.
| Period | Revenue Guidance (Midpoint) | YOY Growth |
|---|---|---|
| Q1 FY2024 | $71.3 Million | 9% |
| FY2024 | $307.5 Million | 15% |
Data Source: C3.ai. YOY = year over year.
But is that enough growth to make up for its losses? In the fourth quarter, C3.ai posted a net loss of $65 million compared to $72 million in revenue. That implies a net profit-margin loss of nearly 100%. With losses that bad, the company will have to sustain much stronger growth rates than a 15% annual rise to justify its existence.
If C3.ai didn't spend a dime more on its operating expenses and grew at a 15% compound annual rate, it would take essentially seven years for the company to generate a profit. That's a lot of growth just to break even, and it makes me question if the stock is worth owning, especially considering the poor assumption that expenses cannot grow.
Because of its massive losses, there's only one way to value the company: price to sales. As you can see, investors have taken quite the roller coaster ride with C3.ai, but the stock is still highly valued.
AI PS ratio; data by YCharts.
At 14.5 times sales, the stock is expensive for its relatively low growth. Throw in its customer concentration plus massive unprofitability, and investing in C3.ai's stock looks like a moon shot.
If you're looking for exposure to AI, there are many better ways to do it. Unless the company's growth or profit margins vastly improve, I think C3.ai stock is a pass for now.
