In the artificial intelligence (AI) investments world, one company nearly always appears at the top of the search: C3.ai (AI 3.02%). With AI right in its name, it's pretty clear to investors what the company does -- or is it?
C3.ai has been around for a while and has been through some different iterations as a company. Investors must know a few things about C3.ai's past that could influence whether they take a position in the stock today. Read on to find a few vital pieces of information about this company and whether the stock is worth buying today.
1. C3.ai has transformed itself multiple times
C3.ai wasn't always known as C3.ai. In 2009, it was founded as C3 and helped its clients understand new carbon policies. Then, it changed its name to C3 energy management, as it helped its clients use energy more efficiently. Then, the company transitioned to being known as C3 IoT, indicating a shift to focusing on the Internet of Things -- a popular investing buzzword back in 2016. Finally, in 2019 C3 IoT renamed itself to C3.ai to cash in on the hype centered around AI.
Businesses often change names to indicate a focus shift, much like when Facebook renamed itself as Meta Platforms. However, making four name changes in under 15 years seems a bit extreme, especially when the name changes are associated with buzzwords like IoT and AI.
Still, C3.ai offers competitive AI solutions for its clients that can be plugged into existing systems. While the name changes are a bit of a red flag, they still indicate actual product pivots, making them slightly more acceptable.
2. C3.ai has revamped its billing structure
If you look at C3.ai's financial results, you'd likely be confused about why a company in a massive growth industry like AI isn't growing its sales at all. In the fourth quarter of fiscal year 2023 (ended April 30), C3.ai's sales rose 0.1%. This is because C3.ai switched its billing model from a subscription service to a usage service.
Billing clients based solely on how often they use its products versus a flat annual subscription aligns C3.ai's interests with its customers, as C3.ai wants to make a product that is worth using all of the time. However, this can cut both ways, as clients may pull back their spending during difficult economic times.
This change was announced during the first quarter of fiscal year 2023, so starting in the second quarter of fiscal year 2024, investors will see actual year-over-year comparisons.
It is also why Q1 FY 2024 guidance is weak compared to the full-year outlook.
| Period | Revenue | YOY Growth |
|---|---|---|
| Q1 FY 2024 | $71.25 Million | 9.1% |
| FY 2024 | $307.5 Million | 15.3% |
Data source: C3.ai. YOY = Year over Year.
Still, 15% growth for a company operating in a supposedly booming industry like AI seems a bit weak. It also doesn't support C3.ai's absurd valuation.
3. C3.ai stock is very expensive for the growth it puts up
Profitability isn't anywhere close for C3.ai, as it reported a $73.3 billion operating loss in Q4 -- an astounding 101% operating loss margin. As a result, we are forced to use sales to value the company.
AI PS Ratio data by YCharts.
As you can see above, C3.ai's valuation has skyrocketed since the start of the year. While 4 times sales was probably too low for the company to be valued at the start of 2023, 17 times sales is likely too much.
Even if C3.ai doubled its revenue without increasing costs (an impossible task), the company still wouldn't be profitable. Furthermore, a 15% annual growth rate doesn't support this valuation, as plenty of other software companies are growing at a much faster rate with a lower valuation than C3.ai.
With these three thoughts in mind, it's pretty clear to me that investors should avoid C3.ai's stock. While it may continue to see some short-term performance thanks to AI investment hype, it doesn't have the growth to become a viable long-term investment.
