Business-oriented artificial intelligence (AI) expert C3.ai (AI 3.02%) is an enigma wrapped in machine learning code. The stock has more than doubled in 2023 thanks to OpenAI's ChatGPT kicking up a wave of unquenchable AI interest.
On the other hand, investors are finding out that C3's tools are nothing like the consumer-friendly ChatGPT experience, and the stock has fallen 46% below its 52-week highs.
Has the dip in stock price created a golden opportunity for investors, or is caution still the wiser path? Let's find out.
The bull case for C3.ai
Before we get into the nitty-gritty detail of C3's AI expertise, let me just applaud the company's squeaky-clean financial condition. In the first quarter of fiscal year 2024, reported in early September, C3's balance sheet held no long-term debt but $751 million in cash equivalents and short-term investments.
The company's operations consumed approximately $141 million of free cash over the last four quarters. That's a painful way to run the business, but also a common one among high-growth technology companies. Excess cash is spent on growth-promoting items like marketing or product research.
At this rate of cash burn, C3 could go several years without grasping for additional cash through loans or stock sales. At the same time, C3's sales are growing, and the cash burn is shrinking over time. If all goes well, this business could very well start generating cash profits without ever resorting to emergency cash grabs.
On that note, C3 really is an AI expert, and its business should thrive over the next few years. The ChatGPT-based AI boom should make it easier to explain, promote, and finally sell C3's business-class variation of AI tools.
At the same time, red-hot global interest in machine learning and generative AI will undoubtedly drive a long-lasting surge in AI research that C3 can tap into. And let's not forget that millions of bright kids will seek an education in AI technologies -- giving C3 better access to the right type of computer engineers.
Sure, other companies are going to enjoy the same AI-expertise benefits, but C3 is arguably positioned to exploit them better than most. Again, this company has been developing and selling AI systems for years already.
With these qualities in its favor, one could argue that C3.ai has earned every inch of this year's rising stock chart -- and then some.
The bear case against buying C3.ai right now
On the flip side of C3.ai's coin, the company also faces many challenges, including:
- We already looked at the negative cash flows. That's not a problem in a perfect world, but what if something goes wrong in 2024 or 2025? C3.1i could be forced to either raise more cash or slow down its growth-oriented spending.
- The tech sector is packed with AI specialists nowadays. Some are established veterans, while others are newcomers to this game-changing technology. Either way, C3.ai will surely face more head-to-head competition for AI-driven business intelligence contracts in the near future. C3.ai is the gold standard of its niche so far, but that could change.
- Almost nobody was talking about generative AI and large language models a year ago. Now, these tools are the talk of barber shops and water coolers everywhere. That could absolutely happen again, changing the conversation in a hurry. Is C3.ai equipped to handle the next sea change in information technology?
- The ChatGPT revelation also caught the eye of lawmakers and regulators, in Washington and around the globe. New regulations will enter the AI market as these rule makers grapple with the implications of machine-powered intelligence that almost feels human. The changes could affect C3.ai's ability to develop, market, track, support, and profit from artificial intelligence. The scary part of this issue is that nobody knows what the regulatory AI framework will look like in five years.
On top of these potential problems, C3.ai's stock trades at a nosebleed-induction valuation. The company is unprofitable, rendering profit-based metrics such as price to earnings or price to free cash flow meaningless. C3.ai's stock trades at 10.2 times trailing sales, which is more helpful but also chilling. Fellow AI specialists such as UiPath (PATH 0.26%) and IBM (IBM -1.05%) carry price-to-sales ratios of 7.5 and 2.1, respectively.
From this perspective, you might conclude that C3.ai's stock has soared too high and too fast, even after the recent 45% price drop. The company's AI-based business prospects are already priced into the stock -- and then some.
Image source: Getty Images.
Final verdict: C3.ai is no more than a "hold" for me
You've seen the pros and cons of buying C3.ai stock today, and both sides of this question come with some compelling arguments. But in the end, I don't see a no-brainer buy in this stock. There are too many uncertainties in the air, and the stock is too expensive. I would be more interested if C3.ai's stock price was much lower, or if the AI landscape consolidates a bit -- with C3.ai emerging as a solid leader.
So I don't mind staying on the sidelines, waiting for one of these improvements (or both!). Building a tiny position might make sense, just to have some skin in C3.ai's AI game, but I don't think this is the right time to go all-in on this promising, misunderstood, and probably overpriced stock.
