C3.ai (AI 1.36%) has been a volatile and divisive stock ever since its public debut in Dec. 2020. The enterprise artificial intelligence (AI) software company priced its IPO at $42, and its stock more than quadrupled to an all-time high of $177.47 that same month. Investors were initially drawn in by its rapid revenue growth and catchy ticker symbol.

At its peak, C3.ai's enterprise value hit $16.7 billion, or 91 times the revenue it would actually generate in fiscal 2021 (which ended on April 30, 2021). That bubbly valuation became unsustainable as its growth cooled off, it racked up more losses, and rising interest rates broadly drove investors away from speculative tech stocks.

A digital illustration of a brain floating over a circuit board.

Image source: Getty Images.

C3.ai's stock sunk to $11 by the end of 2022, yet it has quadrupled to about $44 since the beginning of 2023. Nearly all of that growth was driven by the recent buying frenzy in AI-related stocks.

The bulls claim C3.ai will profit from the expansion of the AI market, while the bears dismiss its comeback as unsustainable market hype. Should you listen to the bulls and believe C3.ai will make you a millionaire by generating some big multibagger gains over the next few years? Or is this just another meme stock that deserves to trade a much lower valuation?

Why the bulls believe C3.ai will make you a millionaire

C3.ai develops AI algorithms that can be plugged into an organization's existing software infrastructure to automate and accelerate tasks, streamline operating procedures, improve employee safety, detect financial fraud, and cut costs. It primarily serves large customers in the energy, industrial, defense, and financial sectors.

The bulls believe C3.ai's tools put it in a prime spot to profit from the expansion of the global AI services market, which Grand View Research estimates will grow at a compound annual growth rate (CAGR) of 37% from 2023 to 2030. C3.ai has also been integrating its AI tools into Alphabet's Google Cloud Platform and Microsoft's Azure, and Amazon Web Services (AWS) to reach more cloud-based customers.

C3.ai's revenue grew at a CAGR of 19% between fiscal 2020 and fiscal 2023, and analysts expect its top line to grow at a CAGR of 18% from fiscal 2023 to fiscal 2025. If it can maintain a CAGR of 15% over the next 15 years, it could grow its revenue tenfold from $267 million in fiscal 2023 to $2.67 billion in fiscal 2038. Its profitability could also improve as its acquires more companies and economies of scale kick in, and it could generate some big multibagger gains.

Why the bears believe C3.ai's stock will collapse

Yet the bears will point out that C3.ai doesn't actually develop fancy AI tools. Instead, it still largely sells updated versions of the same machine learning software as it did back when it was known as C3 Energy and C3 IoT (Internet of Things). It only rebranded itself as C3.ai in 2019 as investors became more interested in AI-related technologies.

Furthermore, C3.ai's founder and CEO Tom Siebel is best known for selling his previous company, Siebel Systems, to Oracle for nearly $6 billion in 2006. C3.ai's constant rebrandings (which correlate with the market's interest in the energy, IoT, and AI markets) suggest the company was founded to attract potential suitors instead of growing as a stand-alone company. In that context, it's not too surprising that analysts expect C3.ai to remain deeply unprofitable for the foreseeable future.

C3.ai's other weaknesses are easy to spot. It generates about 30% of its annual revenue from a joint venture with the energy giant Baker Hughes, but that crucial deal is set to expire in fiscal 2025 with no guarantee of a renewal. It also faces intense competition from first-party AI services that are directly integrated in Azure, Google Cloud, and AWS, as well as third-party analytics and automation competitors like Alteryx.

C3.ai has also gone through three CFOs since its IPO, repeatedly shifted its growth metrics, and abruptly pivoted from a subscription-based model to a usage-based one last year to cope with the macro headwinds. Those flaws might be easier to overlook if C3.ai were trading at a discount valuation, but its current enterprise value of $4.3 billion is still 14 times higher than its projected revenue for fiscal 2024.

That high valuation might be sustainable if C3.ai grows its revenue at a CAGR of 15% over the next two decades. Unfortunately, the cracks in its business suggest its revenue growth could still easily slow to the single digits. If that happens, C3.ai's valuations would deflated and its stock would crash.

This isn't a millionaire-maker stock

C3.ai's stock was driven back above its IPO price by all of the generative AI hype this year, but I don't think its gains are sustainable. Its growth might stabilize as the macro environment improves, but its potential loss of Baker Hughes, the competitive challenges, jarring business model changes, and high valuation all raise bright red flags. So instead of betting on C3.ai's long-term growth, investors should buy more balanced plays on the booming AI market.