Is the artificial intelligence (AI) hype finally subsiding?
One stock that has been a big beneficiary of the 2023 AI boom is C3.ai (AI 3.02%). The aptly named company sells AI services to enterprises, but is highly unprofitable and trades at a steep valuation , with shares up 176% year to date even after falling in recent weeks. If you own C3.ai, is now the time to sell this high-priced money-loser? .
What the heck is C3.ai?
C3.ai sells AI software to enterprises in a wide array of industries, from manufacturing to healthcare to defense.
The company did not always have this focus. It was originally founded as C3 Energy, selling services to the smart grid market when that business idea was hot . Then, in 2016 it changed its name to C3 IoT to get in on the buzz around the Internet of Things. It was only in 2019 that it changed its name to C3.ai and began its focused on selling enterprise AI products. It went public shortly thereafter through a reverse merger with a special purpose acquisition company (SPAC) at a market cap of over $10 billion. It is not clear what spurred these business changes as C3.ai was a private company at the time.
While there is nothing inherently wrong with a young company pivoting its business model, it would be quite the coincidental timing that C3.ai decided to change its strategy at exactly the time these three industries (smart energy grids, internet of things, artificial intelligence) went through investor hype cycles. Does the company's management team actually want to serve its customers with AI applications? Or are they just happy to ride the current wave of what investors are excited about? If the answer to the second question is "yes," these are not executives putting their best foot forward for outside shareholders.
Losing money (and not growing)
If its business model changes have you concerned about C3.ai, then its financials will get you spooked. In the company's fiscal 2023, which ended April 30, it generated $267 million in revenue, up $14 million from the year prior. In order to achieve that revenue growth, it spent $183 million on sales and marketing. That is $183 million in customer acquisition spending in order to add $14 million in new sales. Highly inefficient, if you ask me.
But that actually makes the numbers look better than they are. Due to a change in its revenue mix, C3.ai's gross profit actually declined in its fiscal 2023 to $180 million from $189 million the year before. This means the company actually spent more on marketing than it generated in gross profit. Add all these numbers together and you can guess what the bottom line looks like: bad and getting worse. In fiscal 2023, the company posted an operating loss of $290 million, compared to its operating loss of $196 million a year prior.
No growth, deteriorating margins, and huge bottom-line losses. There's not much to like -- if anything -- about C3.ai's financial situation.
Valuation is stretched
AI PS Ratio data by YCharts.
After the stock's huge run-up this year, C3.ai has a market cap of $3.53 billion. That gives it a trailing price-to-sales ratio of 12.6, or around 5 times the S&P 500's average ratio of 2.44.
What this means is that investors are pricing strong growth and margin expansion into the stock. The problem, clearly illustrated above, is that C3.ai lacks both. And it is hard to see how these financial problems will get fixed. If C3.ai's revenue isn't rapidly growing in 2023 during a boom in demand for AI products, when will it ever start growing ? Shareholders need to look in the mirror and ask these hard questions about the company and this management team.
Investors should be cautious with C3.ai. This has the potential to be just a hype train headed for disappointment in the years to come.
