AT&T (T 1.02%) and C3.ai (AI 3.02%) generally appeal to different types of tech investors. AT&T, one of the largest telecom companies in America, is usually owned for stability and dividends instead of aggressive gains. C3.ai, an enterprise AI software company that went public less than three years ago, is a speculative growth play.
Yet both of these stocks disappointed those target investors. If you had invested $1,000 in AT&T on April 11, 2022 -- the first day it traded separately from Warner Bros. Discovery -- your investment would only be worth about $760 today. If you had invested $1,000 in C3.ai's IPO on Dec 9, 2020, your investment would be worth less than $600. Let's see why these two stocks flopped, and if either one is still worth buying in this challenging market.
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Why did investors give up on the "new" AT&T?
Throughout 2021 and 2022, AT&T spun off DirecTV, Time Warner, and many of its smaller media assets to abandon its ill-fated attempt to become a diversified media giant. That streamlining strategy enabled it to focus on expanding its higher-growth 5G and fiber businesses and gradually reduce its debt.
But three issues dragged down this "new" AT&T' stock. First, it reduced its annual dividend by 46% in early 2022 prior to spinning off WBD. AT&T's investors received 0.24 shares of WBD for each share of AT&T they held, but many of them were likely disappointed by the massive reduction to its forward dividend yield.
Second, AT&T initially claimed it could generate $20 billion in free cash flow (FCF) as a stand-alone company in 2023. But as the macro headwinds intensified over the past year, it reduced that outlook to $16 billion. On the bright side, it recently raised that forecast to $16.5 billion, which should easily cover its dividends this year.
Lastly, AT&T and Verizon Communications were both accused of ignoring the safety issues in the lead-sheathed copper cables across their legacy wireline networks. It could potentially cost AT&T billions of dollars to replace those cables.
All of those challenges, along with sluggish growth of its business wireline segment, repeatedly overshadowed the robust growth of its 5G wireless and fiber businesses. Analysts still expect its revenue and adjusted EPS to decline 5% and 11%, respectively, this year before finally returning to growth in 2024. Those growth rates seem sluggish, but AT&T's stock still looks dirt cheap at 6 times forward earnings, and pays a high forward yield of 7%.
Why did C3.ai lose its luster as an AI play?
C3.ai initially gained a lot of attention -- it had a catchy ticker symbol, it was growing rapidly, and it was led by Tom Siebel, an industry veteran who previously orchestrated the sale of Siebel Systems to Oracle for $5.9 billion. But three glaring problems drove investors to abandon this enterprise AI software maker as interest rates rose.
First, C3.ai's growth cooled off. Its revenue rose 38% in fiscal 2022 (which ended in April 2022) but grew just 6% in fiscal 2023. It mainly blamed that slowdown on the macro headwinds, which drove companies to rein in their software spending. But it was also caused by an abrupt shift from subscriptions to usage-based fees, which the company insists was necessary to gain the attention of cost-conscious clients in this difficult market.
Second, the company recently abandoned its previous goal of achieving profitability on a non-GAAP (generally accepted accounting principles) basis in fiscal 2024. Instead, it plans to ramp up its spending on developing new algorithms for the generative AI market -- which is ironic, since generative AI tools like ChatGPT could eventually render the company's own AI algorithms, which are plugged into a company's existing software, obsolete.
Lastly, C3.ai hasn't renewed its joint venture with the energy giant Baker Hughes, which accounts for over 30% of its revenue. If C3.ai fails to renew the deal before it expires in fiscal 2025, its revenue will plummet.
Analysts expect C3.ai's revenue to rise 15% this year, but its future is murky and its stock still isn't a screaming bargain at seven times this year's sales. The buying frenzy in AI stocks over the past year kept some investors interested in C3.ai as a short-term trade, but its long-term weaknesses are impossible to overlook.
The better buy: AT&T
I wouldn't rush to buy either of these out-of-favor stocks in this wobbly market. But if I had to choose one over the other, I'd stick with AT&T because it has clear competitive advantages, its stock is cheap, and it pays a generous dividend. C3.ai needs to overcome a lot of existential challenges before it can be considered a viable growth play again.
