Artificial intelligence (AI) is all the rage among investment communities. Everyone seems to be trying to find the next application that AI could disrupt, and which company may benefit. While big tech and semiconductor companies alike enjoy stratospheric stock price movements, there is one company in particular that may be subtly reaping the most benefit.
C3.ai (AI 2.03%) has seen its stock price increase nearly 320% year to date as of the time of this article.
While C3.ai is certainly part of the AI revolution, investors should not blindly follow the pack. The company is clearly riding some momentum due to the AI mania, and it doesn't hurt that one of the most respected research analysts on Wall Street just doubled his price target for the stock. Let's dig into the fundamentals and assess if C3.ai deserves a place in your portfolio.
How is the company performing?
For its fiscal year ending April 30, C3.ai reported $267 million in total revenue, an increase of 6% year over year. Although 6% top-line growth may appear slightly muted, the real concern revolves around the company's margin and cash-flow profiles.
For the year, C3.ai reported a gross margin of 67%, a meaningful decline from the prior year's 74%. Furthermore, operating losses ballooned from $190 million in fiscal 2022 to $296 million in fiscal 2023. This was primarily driven by significant increases in research and development costs.
Although contrasting C3.ai to big tech is a bit of an apples-to-oranges comparison, there is something to be said when some of the largest corporations in the world are slashing costs, and a small, slow-growing company is growing costs.
While bulls argue that C3.ai is reinvesting in its business to fuel future growth, it's less compelling when its cohorts are either exercising strict cost discipline, or already benefiting from its new products, namely in AI.
Image source: Getty Images.
Is there an opportunity?
Wedbush Securities research analyst Dan Ives recently upgraded his price target on C3.ai stock from $24 to $50. One of Ives' reasons for the price hike was that the addressable market for AI is gigantic and seems to be growing in real time. In other words, even behemoths like Microsoft or Alphabet will not acquire an overwhelming majority of the AI landscape. What's more is by doubling his price target, Ives seems to be implying that he is bullish on C3.ai's future prospects.
While Ives certainly has an impressive track record, I'm not aligned with this take. I'd agree that the evolving and growing AI market is up for grabs. However, given C3.ai's mundane revenue growth and lack of profitability, it seems like the company will be perpetually playing catch-up against its peers.
Is the stock a buy?
One of C3.ai's closest competitors is Palantir Technologies. Palantir's trailing-12-month revenue is just shy of $2 billion and the company's market cap is about $33 billion. Moreover, Palantir's top line is growing well above 20% annually, and the company has reached profitability. Given these parameters, one can deduce that Palantir's price-to-sales ratio (P/S) is roughly 16. By comparison, C3.ai's P/S is 15.
It's hard to make a case for C3.ai as a compelling buy at its current valuation. The company is doing less than $300 million in total sales, and yet its market capitalization is nearly $5 billion. Moreover, the company is growing far slower than one of its primary competitors and it's not even close to profitability.
Yet despite the clear-cut metrics, the stock is up almost 80% just over the last 30 days alone. It's pretty obvious that the stock seems to be disconnected from underlying fundamentals.While this is purely speculation, I have my fears about C3.ai turning into a meme stock.
I want to be clear that C3.ai could one day be a winner in the AI space. However, knowing what I do today, it's hard to justify buying this stock -- especially at this price. The rationale that the AI landscape is so big that many different players will benefit is not a compelling enough investment thesis for me. If you are a long-term investor looking for exposure to AI, there are plenty of other alternatives. If C3.ai in particular sparks your interest, my suggestion would be to wait and assess some more earnings reports to gauge the company's progress and path toward profitability.
