C3.ai (AI -0.72%) has been one of the biggest winners on the stock market this year, riding the surge of investor interest in all things artificial intelligence (AI).
Through June 6, the stock was up 241% year to date, but those gains haven't been smooth. Along the way, the AI enterprise software platform has been attacked by short-sellers, and it whiffed on its latest earnings report.
The stock fell 13% after it reported fiscal fourth-quarter earnings on May 31 as it offered tepid guidance for fiscal 2024, but one Wall Street analyst was singing the company's praises.
Wedbush's Dan Ives upgraded the stock on June 1 from neutral to outperform and raised his price target on the stock from $24 to $50. Ives acknowledged that it would be a "bumpy road" for C3.ai, but he said the company had turned a corner and is set to take advantage of the $800 billion opportunity in AI over the next decade. Ives' bullish forecast contrasts with most of his colleagues, as the average price target on C3.ai calls for a decline in the stock. Still, his call deserves some attention, especially after the stock has already tripled this year.
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Can C3.ai keep gaining?
Based on C3.ai's surge this year and the company's focus on artificial intelligence, you might think it's fast-growing. However, that isn't the case.
Considering its most recent quarters, C3.ai isn't growing at all. Revenue was flat in the fiscal 2023 fourth quarter, and it actually declined in the third quarter. The company blamed that in part on its shift from a subscription model to a consumption model, which it believes more closely aligns with the way customers use its products, but its guidance for fiscal 2024 doesn't inspire a whole lot of confidence in its growth potential.
For the new fiscal year, management guided for revenue of $295 million to $320 million, implying 15% growth at the midpoint. That's not enough to justify C3.ai's lofty valuation, which is currently 16 times sales, and the company remains deeply unprofitable.
In fiscal 2023, it posted a generally accepted accounting principles (GAAP) operating loss of $290.4 million. Management expects margins to improve in fiscal 2024, forecasting an adjusted operating loss of $50 million to $75 million, and said it would exit fiscal 2024 sustainably profitable on a non-GAAP (adjusted) basis. That profitability target excludes share-based compensation, which totaled $216.5 million in 2023, or more than 80% of revenue.
Can C3.ai capitalize on the market opportunity?
Ives isn't wrong that there's a massive opportunity in artificial intelligence, but AI is a broad category, encompassing everything from robotics to autonomous vehicles to machine learning and large language models like ChatGPT.
A large addressable market alone isn't a buy case either, and the company's sluggish growth is evidence that it's struggling to capitalize on the opportunity.
C3.ai makes most of its money from selling its more than 40 AI applications to customers. This includes prepackaged AI-based software suites focused on things like demand forecasting, schedule optimization, and supply chain management. The company says that while it does face competition, it's "unaware of any end-to-end Enterprise AI development platforms that are directly competitive with the C3 AI Application Platform."
However, that lack of direct competition may be more of a reflection that competitors don't see the market as attractive right now. Presumably, a big tech company like Microsoft would be able to muscle into the AI application market if it wanted to, especially given its close relationship with OpenAI. That Microsoft hasn't done so, especially when it competes in so many different software categories, seems to signal that AI applications aren't a priority for it.
C3.ai would have to prove that it can become profitable and consistently expand its bottom line to be worth the valuation at this point. The stock could hit $50 in the near term, especially as the AI stock has been highly volatile this year, but over the long run, given the company's valuation and lack of growth, the stock looks more likely to pull back than be a winner.
