Possibly more than any other stock, C3.ai (AI 3.02%) has been the poster child for the artificial intelligence (AI) hype cycle.
The stock surged at the beginning of the year as OpenAI's launch of ChatGPT set off a wave of interest in all things AI among investors, and with AI in both its name and its ticker symbol, it's not surprising that C3.ai more than tripled at one point on the boom.
C3.ai bills itself as AI for the enterprise company. It sells large-scale solutions to help businesses manage things like demand forecasting and global supply chains, and it also offers an AI platform.
While the company has been investing in AI for years, its actual results have been less than impressive, and the gap between the company's own commentary and its numbers was on display again in its recent fiscal first-quarter earnings report. The stock fell double digits, and the news confirmed a number of red flags facing the company and its investors.
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1. Revenue growth remains weak
Management continues to hype up the demand and interest in AI. For example, CEO Thomas Siebel said in the earnings release, "It is difficult to describe the scale of the increasing interest that we are seeing globally in enterprise AI adoption."
However, despite saying that for several quarters, the company has yet to convert that interest into meaningful revenue growth, and its outlook for the rest of the year confirmed that.
Revenue in the first quarter grew just 11% to $72.4 million, and for the full year the company maintained its revenue guidance of $295 million-$320 million, representing 15% growth at the midpoint and only minimal sequential growth from the first quarter.
Gross margin in the quarter fell sharply from 72% to 56%, which the company attributed on the earnings call to a higher mix of pilots, or customers testing out its software. But that doesn't seem to factor into its guidance in any material way.
The company launched a new generative AI suite, but again, there's no evidence of meaningful revenue growth stemming from it.
2. Shareholder value is still being destroyed
While C3.ai's revenue growth is problematic, what's happening further down the income statement is even more concerning. The company continues to burn cash and dilute shareholders with excessive stock-based compensation.
In the first quarter, it reported a generally accepted accounting principles (GAAP) loss of $64.4 million, losing nearly as much as it made in revenue, and it reported a free cash flow loss of $8.9 million.
C3.ai also spent roughly 70% of its revenue on share-based compensation, an unsustainable percentage, which led it to dilute shareholders, as shares outstanding rose 8% from the quarter a year ago. With the stock price down 40% from its peak in the spring, share-based compensation is only going to get more expensive.
Management also backed away from a target of reaching adjusted profitability by the end of the current fiscal year, pushing that back to fiscal 2025, as the company cited the massive opportunity in AI and the need to invest in it.
The company also lowered its bottom-line guidance for the fiscal year, now forecasting an adjusted operating loss of $70 million-$100 million.
In other words, the company is putting up wide losses and diluting shareholders with only minimal revenue growth.
3. The valuation is unsustainable
Based on forward guidance, C3.ai stock trades at a price-to-sales ratio of more than 10, a high price for a stock with sluggish revenue growth, wide losses, and excessive share dilution.
That valuation implies that C3.ai will eventually deliver a meaningful profit and significant revenue growth in AI software, but thus far there is little evidence that the company can convert existing customer interest into revenue.
C3.ai has been in business for 14 years, and would seem to be well-positioned for the current demand environment. But the numbers don't back that up.
With no sign of improvements in the financials on the horizon and only unjustified hype from management, the stock should continue to fall further as the hype cycle in AI stocks fades.
