C3.ai (AI 3.02%) has been the target of some popularity, mainly because its name includes the abbreviation "AI," short for artificial intelligence.
The stock is up an incredible 260% this year alone, but many think it has room to skyrocket even past that. So should you hop on the C3.ai ride? Or are you playing with fire by investing in it?
C3.ai isn't being transparent with its bookings metric
C3.ai provides plug-in AI solutions for its clients. With products that can help manage supply chains, implement predictive maintenance, or analyze financial transactions to detect money laundering, C3.ai has a wide variety of applications. Still, its largest customer base remains in the oil and gas field, making up 34% of total bookings (bookings are a forward-looking metric) in fiscal 2023, which ended April 30.
Historically, oil and gas has made up a higher percentage of revenue, so the change in its bookings diversity is welcome news for investors.
However, one piece of information missing from C3.ai's report is the monetary value of bookings. Without knowing whether the bookings figure was increasing, it's hard to tell if there's growth ahead for the company or not. Even though C3.ai's management has guided for 34% growth in 2024, this doesn't necessarily translate directly to bookings.
Some of these bookings were for multiple years, such as the five-year, $500 million contract with the U.S. Department of Defense. This can skew metrics heavily, and it seems odd management wouldn't report booking metrics like many other software companies do, such as Palantir (another popular AI company). It's a completely optional metric for C3.ai to report, but without having access to the figure, investors are left in the dark about what C3.ai's future looks like.
Investors will better understand how those bookings translate to revenue over the next couple of years, but that isn't a solid enough stance to take an investment position today. As a result, I think it's a red flag for the stock.
Another red flag appears if you look at the company's bottom line.
C3.ai trades at a premium without a good reason
In fiscal 2023, C3.ai lost $269 million on only $267 million in revenue, which meant its expenses were more than double its revenue. That's a massive loss, and it is only getting worse.
With operating expenses increasing by 48% from fiscal 2022 to fiscal 2023, C3.ai is not following its industry peers in trying to become more efficient by cutting costs. Furthermore, this doesn't even come close to C3.ai's revenue growth rate, so these losses are only expected to widen.
Despite that, investors have drastically bid up the stock because of its focus on AI technologies.
AI PS Ratio data by YCharts
With the stock trading at 17 times sales, it's already expensive. Throw in C3.ai's massive unprofitability, poor revenue growth, and lack of bookings guidance, and investors have a recipe for disappointment.
While C3.ai's stock may still skyrocket from here due to investors' excitement about AI-focused stocks, C3.ai's stock looks dangerous over the long term. I think investors should stay away from the stock, as the company hasn't shown it can back up its premium valuation with tangible business results.
