As businesses look to integrate various types of artificial intelligence (AI) into their systems, companies offering plug-and-play solutions stand to benefit because they can be deployed quickly. C3.ai (AI 3.02%) has multiple drop-in offerings that help its customers solve problems in areas that are quite common.
However, thanks to the recent hype surrounding AI stocks, C3.ai's stock has turned into a rocket ship, leaving many prospective shareholders behind. But has the stock run too far? Or is it time to establish a position? Let's find out.
C3.ai has AI solutions for multiple industries
C3.ai has products for various challenges many customers will face. For example, it has an energy management product for reducing operating costs, a supply network risk solution for pinpointing choke points, and inventory optimization to make a manufacturing business leaner.
These products have been used in multiple industries, but C3.ai's primary customers are coming from two fields: oil and gas and defense. In fiscal year 2023 (ended April 30), oil and gas comprised 34% of C3.ai's bookings, and federal aerospace and defense made up 29%. With over three-fifths of its business coming from these two industries, C3.ai has clearly found its niche.
Additionally, C3.ai also has an LLM (large language model) product. Generative AI is the same technology that powers many of the chatbots on the internet and can be used alongside any of C3.ai's other products. Even though this product was only released in the fourth quarter, C3.ai saw increased demand and closed three generative AI deals shortly after the launch.
Still, C3.ai has problems, and its financial statements reveal many challenges facing the company.
Stock-based compensation is a problem for C3.ai
At face value, C3.ai's revenue results don't look good for Q4. Revenue only increased by 0.1%, indicating that there may not be much growth left for C3.ai. However, that figure is misleading because the company is amid a billing shift from subscription to consumption. After the company completes its first-quarter results, C3.ai will finally have a full year with the consumption billing method and will become an apples-to-apples comparison starting in the second quarter.
This is reflected in the company's FY 2024 outlook, as it expects revenue to rise 15%. However, that's not very rapid growth compared to its expenses.
C3.ai isn't anywhere close to profitable. In Q4, C3.ai lost $73.3 million in operations while only bringing in $72.4 million, indicating it spent more than double what it brought in. For FY 2023, it's even worse, as C3.ai lost $290 million from operations while generating $267 million in sales. For the quarter and fiscal year, operating losses rose 30% and 49%, respectively, suggesting that C3.ai does not seem to prioritize efficiency.
AI Operating Margin (TTM) data by YCharts.
Management didn't provide generally accepted accounting principles (GAAP) operating guidance, but it did offer a non-GAAP version. For FY 2023, C3.ai expects to post a $62.5 million non-GAAP operating loss. That's nearly in line with FY 2023's $68 million operating loss, which may indicate that C3.ai is becoming more efficient. But don't be fooled; non-GAAP losses subtract out stock-based compensation, a massive part of C3.ai's expenses.
In FY 2023, C3.ai handed out an astounding $217 million in stock-based compensation. Compared to $113 million in FY 2022, that marks nearly a double in compensation. Furthermore, because this figure is subtracted from its non-GAAP guidance, C3.ai could be planning to double its stock-based compensation bill again in FY 2024, but investors wouldn't see the boost if they only looked at the FY 2024 non-GAAP guidance.
Given these issues, C3.ai does not currently appear to be an attractive investment. I need the company to show me that it can grow faster than its expenses; otherwise, it may never achieve profitability. Furthermore, the stock trades for a premium at 17 times sales. There are far better investments at lower prices, so C3.ai is a stock I'm not interested in buying right now.
