Artificial intelligence (AI) has dominated the stock market narrative this year following the launch of ChatGPT. According to some estimates, the market opportunity in AI could be in the trillions of dollars, and the generative AI technology behind ChatGPT has wowed both investors and top executives.
Naturally, this awakening has been great news for AI stocks.
Among the winners has been C3.ai (AI 3.02%), a software-as-a-service company that builds AI applications for large enterprises. C3.ai bills itself as the "AI for the Enterprise" company and offers AI-based tools such as demand forecasting, supply chain management, and inventory optimization.
The stock has soared this year for a number of factors, including its identification with AI; its unique position as an AI-based software company; CEO Thomas Siebel's reputation after selling his software company, Siebel Solutions, to Oracle; and its weak performance in 2022, which sets up an opportunity for a comeback. Let's take a closer look at these factors to see why the stock is up roughly 270% year to date.
Image source: Getty Images.
The AI buzz
Almost every company, including supermarket operator Kroger, seems eager to demonstrate to Wall Street how they're taking advantage of emerging AI technology. Not surprisingly, stocks that are directly connected to AI have been bid up sharply this year, regardless of their underlying performance. For example, BigBear.ai Holdings is up roughly 165%, while SoundHound AI had doubled year to date before fading more recently. By market cap gains, Nvidia has been the biggest winner; shares of the leading AI chipmaker have more than tripled this year.
Nvidia blew investors away with its second-quarter guidance, setting off a dramatic rally over the past two months, but C3.ai's results haven't directly contributed to its gains. Revenue was flat in the last fiscal year, and the company reported wide losses, though it has forecast an adjusted profit.
Still, investors seem to see the company as a potential winner from the emergence of AI. As management says in its annual report, "We are unaware of any end-to-end Enterprise AI development platforms that are directly competitive with the C3.ai platform."
Seasoned leadership
Another reason for C3.ai's explosive gains this year may be the reputation of CEO Thomas Siebel.
He founded Siebel Systems in 1993 as an early customer relationship management software company and sold it to Oracle for $5.8 billion in 2005. After that exit, Siebel started C3.ai with the original goal of helping to reduce carbon footprints, though over time that mission has shifted to AI.
The stock also surged after its IPO in late 2020, a sign of both the frenzy for growth stocks, and investors' own belief in the potential of C3.ai and Siebel's stewardship. After pricing at $42, the stock jumped 140% on its first trade and rose to a peak of $177.47 on Dec. 22, 2020.
However, the stock crashed after that, falling more than 90% after its fundamentals failed to justify its sky-high valuation.
It's since bounced off its bottom on the broader excitement over AI this year.
Is C3.ai stock a buy now?
C3.ai shares currently trade at a price-to-sales ratio of 16, which is a high price to pay for a company posting flat revenue growth and wide losses.
Management expects revenue growth to improve, targeting a midpoint of 15% in its forecasted range for fiscal 2024, but Siebel's hype about a surge in customer interest has yet to be realized.
At this point, C3.ai seems like a stock best avoided. Its business model is still unproven, its recent numbers have been underwhelming, and the valuation is steep.
That could change if the demand for its services picks up or the price drops substantially, but there's no indication that any major change to the business or valuation picture is on the horizon.
Investors can find better opportunities in AI stocks elsewhere.
