The top search result for "AI stock" is usually C3.ai (AI 1.18%), thanks to its ticker symbol: AI. As a result, many people piled into the stock when artificial intelligence investments surged in popularity earlier this year. The stock had risen by more than 300% year to date at its peak of more than $46. But at its current price of around $25, it is well off that high.
Is this weakness a buying opportunity, or was the pullback warranted?
C3.ai has solutions for many industries
C3.ai provides turnkey AI solutions for its customers. Whether their needs are in supply chain management, energy efficiency, or assessing creditworthiness, C3.ai has products for their situation. And, if you have a big enough checkbook, C3.ai will gladly create new solutions for you, just like it is doing for the U.S. Missile Defense Agency, which inked a five-year, $500 million contract with the company.
The company sees generative AI, the technology that powers programs like ChatGPT, as a new growth catalyst, and it's one of the reasons why management pulled its non-GAAP profitability forecast for fiscal 2024. C3.ai is sacrificing short-term profitability in pursuit of long-term market share, which is a move long-term investors should applaud.
But there are limits to how unprofitable a company should be, and C3.ai might be flirting with them.
C3.ai has a long way to go before breaking even
In its fiscal 2024 Q1, which ended July 31, C3.ai generated $72 million in revenue, but its expenses totaled $146 million, meaning C3.ai spent more than twice as much as it brought in. That's not sustainable, but C3.ai has a way around it. By subsidizing its expenses with stock-based compensation, C3.ai uses a non-cash currency (company shares) to stretch its resources. But this harms its shareholders by diluting the value of the previously issued shares.
C3.ai distributed around $51 million in stock-based compensation during fiscal Q1, and spent about $95 million in cash. After subtracting revenue, adding interest income, and factoring out other one-time costs, C3.ai lost $11 million on a non-GAAP basis. With more than $750 million in cash and short-term investments on its balance sheet, C3.ai could operate in this money-losing state for a long time.
But, there is a serious dilution risk for shareholders. Since its public debut in late 2020, C3.ai's share count has risen by 23%. That means each single share now represents far less of C3.ai than it previously did. With the share count growing at a compound annual rate of 7%, C3.ai needs to grow its business by at least that much just for investors to break even.
Unfortunately, C3.ai is barely growing faster than that. In fiscal Q1, its revenue was up 11% year over year. However, better days could be on the horizon: Management is projecting 19% growth for fiscal Q2 and 15% for fiscal 2024.
C3.ai is still a young business (founded in 2009), and is heavily reliant on a handful of contracts. This makes its revenue clumpy and unpredictable, which means any shareholders must be focused on the long term. But long-term investors must also be cognizant of the price they are paying for C3.ai's stock, as even the best companies bought at the wrong prices can make for disastrous investments.
Trading at just over 10 times sales, C3.ai isn't cheap, but it isn't nearly as expensive as it used to be, thanks to the 45% slide in the share price.
AI PS Ratio data by YCharts.
But is C3.ai a buy at these prices? I'd say yes. C3.ai has incredible upside potential over the long term, and now that the stock isn't ridiculously expensive, investors would be OK to establish a position. However, given the volatile nature of C3.ai's business, I'd keep the position sizing small (under 1% of your portfolio) just in case it doesn't work out.
If it does, you'll have a multibagger in your portfolio that has grown to a larger position organically. If it doesn't, the loss won't be so great that it severely affects your portfolio's long-term performance.
