With shares up by a whopping 182% year to date, C3.ai (AI 1.18%) has been one of the big beneficiaries of the stock market's artificial intelligence (AI) craze. The company's catchy name (which was conveniently selected in 2019) seems to have put it in the right place at the right time. But all that glitters is not gold. Let's discuss three reasons investors might want to avoid this high-flying stock.
C3.ai's track record of abandoned business ventures
C3.ai did not always focus on artificial intelligence. The company has a track record of changing its business (and name) at times that are suspiciously coincidental with investment hype cycles. Since its founding in 2009, what is now known as C3.ai has renamed itself several times: from C3 to C3.Energy to C3.IoT -- reflecting business strategy changes from renewables to the Internet of Things and now to AI.
It is unclear what motivated these many business pivots. But in the best-case scenario, it could imply a lack of managerial focus. At worst, it suggests the company attaches itself to trends to distract investors from its lackluster operational performance. And while public financial data isn't available for C3.ai's previous iterations (it was privately held at the time), the company's current results leave much to be desired.
Financial results remain weak
C3.ai's current business model involves selling enterprise-focused AI software designed to analyze and interpret data in multiple industries. For example, an oil company could use its machine learning tools to maximize the output of its wells, a bank could use them to detect and prevent fraudulent transactions, and pharmaceutical companies could use them to assist in drug discovery.
But while there is a market for these services, this is distinctly different from the generative AI (a type of AI designed to create new content) found in platforms like OpenAI's ChatGPT. C3.ai also isn't involved in producing AI-capable computer chips, so it is unclear how the company directly benefits from the hype cycle powering its stock price rally.
The price appreciation also isn't justified by fundamentals.
In the fiscal fourth quarter, total revenue was almost flat -- increasing from just $72.3 million to $72.4 million, while operating losses ballooned by 30% to $73.3 million. Quarterly losses are usually not a deal-breaker for small, growth-oriented companies because investors expect them to eventually scale into profitability. But in C3.ai's case, top-line growth doesn't look fast enough to make this possible.
The valuation looks too high
Despite its weak operational performance, C3.ai's valuation remains sky-high. After its impressive bull run, shares now trade at a price-to-sales (P/S) ratio of roughly 13, which is significantly higher than the S&P 500 average of 2.5. This looks hard to justify, considering the company's slow growth and abysmal bottom line. Investors should sell or avoid the stock because the hype doesn't match the fundamentals.
