At its peak, C3.ai's (AI 1.25%) stock was one of the hottest of 2023, rising an astounding 314% in under six months. However, shares of this maker of artificial intelligence (AI) applications have cooled off of late and are now down over 30% from their recent highs.
Is this sell-off a buying opportunity for one of the top-performing stocks in 2023, or is this just the start of seeing AI stocks come back down to Earth after soaring into the stratosphere? Read on to find out.
C3.ai is heavily concentrated
Thanks to C3.ai's ticker symbol (AI), the company is one of the top results when you search: "AI stock." While the name conveys to potential investors what it does, few know some intricacies about the business.
C3.ai provides various plug-and-play AI solutions for its clients in manufacturing, healthcare, and financial services but is heavily concentrated into two industries: defense, and oil and gas. In its fiscal 2023 (ended April 30), C3.ai's booking distribution looked like this:
Image source: C3.ai.
This expansion into the defense industry is huge for C3.ai since 54% of its bookings came from oil and gas in 2022. However, investors shouldn't put too much hope into this shift as most of this defense booking increase came from a five-year, $500 million contract with the Department of Defense's Missile Defense Agency. While this could open doors to future contracts if C3.ai succeeds, only time will tell.
Furthermore, three customers account for 35%, 20%, and 18% of C3.ai's accounts in FY 2023. With 73% of revenue coming from just three sources, if one of them decides to leave, it will spell disaster for the company.
Losses are piling up at C3.ai
You might be scratching your head if you look at C3.ai's fiscal 2023 and fourth-quarter results. Revenue only increased 5.6% compared to 2022, and it only rose 0.1% in Q4. So how can Wall Street's hottest growth stock show no growth? C3.ai changed its billing strategy in 2023.
During Q1 of fiscal 2023 (ended July 31), C3.ai switched its billing model from a subscription to a usage-based one. As a result, C3.ai had difficult comparisons as its revenue wasn't as high. This will be remedied in Q2 results when it has lapped a full year of the billing change. This is part of why C3.ai projected 34% growth in fiscal 2024 while only guiding for 9% growth in Q1.
Still, one problem C3.ai has is its incredible stock-based compensation bill. In Q4, C3.ai handed out $48 million in stock-based compensation, a 35% increase from last year. Compared to C3.ai's gross profit of $47.5 million, it already locked itself into a loss before paying its employees with cash. As a result, C3.ai has an incredibly high loss from operations: $73.3 million. That means C3.ai's operating loss margin is 101%, meaning it spends over double what it brings in.
AI Operating Margin (Quarterly) data by YCharts
That's a massive hole to dig out from underneath, and it will be some time before C3.ai can even catch a whiff of profitability.
As a result, I think C3.ai's stock is too risky to buy right now. The company may see a massive boom, but the aggressive spending levels and dependence on a few contracts worry me. I think there are much better AI stocks out there, and investors should investigate those before taking a position in a moonshot like C3.ai.
