Artificial intelligence (AI) has been the buzzword of the year on the stock market, and it's easy to see why. ChatGPT has opened a new world to what's possible with generative AI, and as a result, companies are quickly hopping on the bandwagon to leverage what looks to be the next transformative technology.
As a result, a number of AI stocks have soared this year, among them C3.ai (AI 3.02%), whose shares have more than doubled since the start of the year. But is C3.ai truly a leader in artificial intelligence, or are these gains just hype? To debate that subject and whether the stock is worth buying, we asked a bull and a bear to weigh on C3.ai. First, we have the bull case.
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Business-grade AI: C3.ai's unique path to long-term growth
Anders Bylund (C3.ai bull): I'll admit that C3's stock comes with a lofty price tag. From operating income to operating cash flows to earnings before interest, taxes, depreciation, and amortization (EBITDA), the company is unprofitable in every way. If you step back to revenue-based valuation metrics instead, C3.ai still looks pricey at 10 times trailing sales. These high prices were created by a 126% stock price gain in 2023, which in turn started with the ChatGPT craze.
So C3 isn't exactly earning its keep at the moment. Value-oriented investors may want to stay away for a while.
But that's not the whole story. As a growth investor at heart, I see many reasons to build a C3.ai position today despite these value-based concerns.
- C3.ai is not another take on the popular ChatGPT style of AI. Instead, it offers a portfolio of hyperspecialized tools to give businesses AI-powered reports, actionable insights, and spending recommendations based on data that is specific to each sector. The banking platform is different from the energy production tools because the businesses have very different needs.
- On top of that specialized out-of-the-box experience, C3 customers can fine-tune their services with in-house programming by integrating the platform with existing business analytics tools and -- most importantly -- through training C3's back-end AI engine on the company's very own data.
- So, C3 provides an intensely business-focused service that is nothing like ChatGPT. This results in a slow-burn growth opportunity with an ambitious target market in the long run. Implementing a new data management tool requires testing, integration work, and management approvals. That takes time and costs money. But once you get through those gates, the end market is enormous, and those hard-won customers won't leave on a whim. A jack-of-all-trades system like ChatGPT can't match C3's unique stickiness.
It may take years for C3 to reap the benefits of the soaring AI interest in 2023. I can't promise that today's rich share price will be the best entry point along the way. On the other hand, I see a ton of greenfield opportunity in the years ahead. The midcap market value of $2.9 billion we see today will probably look quaintly cheap when C3's long-term growth story plays out.
This isn't an all-in opportunity due to the high stock price. However, I think it's a mistake to ignore C3's unique growth trajectory. You may want to use a patient investing approach, such as buying in thirds, taking advantage of volatile share prices over time. Whatever method you prefer, C3 looks like a good fit for the AI corner of any growth-oriented portfolio.
Too many red flags
Jeremy Bowman (C3.ai bear): On the surface, C3.ai looks like it could be a big winner from the AI boom. It bills itself as the AI for enterprise company, and it has "AI" in its name and its ticker.
The company offers an AI platform that allows different teams to work together on enterprise AI applications like demand forecasting and inventory management. It also offers these as stand-alone applications, and the individual applications have proven to be more popular than the platform altogether.
Despite the hype around AI and C3's own comments about the opportunity in AI, its results seem to make the opposite case. For a software stock in an industry getting a lot of attention, C3.ai's revenue growth has been nearly nonexistent, rising just 11% in the fourth quarter, and management is calling for just 15% revenue growth this fiscal year. Combine that with its wide losses, and it's hard to justify the company's lofty multiple.
However, there are more than just numbers that stand out as a red flag with C3 AI. The company has changed its name three times over its history. It was founded in 2009 as C3, became C3 Energy in 2012, and then renamed itself as C3 IoT in 2016. Finally, it changed its name to C3.ai in 2019. If that sounds like the company is just trying to ride the latest trend in the tech sector, that's because it is. That doesn't mean C3 doesn't offer real products, but the business doesn't seem to know what it stands for and has changed its name to capitalize on the hype around new tech trends. If interest in AI fades, it wouldn't be surprising to see the company change its name again.
Additionally, C3.ai says it knows of no competitor in the industry, but that's likely because it hasn't proven the opportunity yet. The company lost nearly as much money as it made in revenue in its most recent quarter. If the space was more attractive, it wouldn't be surprising to see a company like Microsoft, which is quickly making headway in enterprise AI, muscle C3 out of the space.
Overall, C3's growth is minimal. Its losses are considerable. Management is untrustworthy, and it doesn't seem to have any competitive advantages. Given its valuation, the odds seem clearly stacked against the stock at the current price.
