While I've been a proponent of artificial intelligence (AI) investing, there are some companies I just cannot justify investing in. For one reason or another, there are just too many red flags that can make any of these companies uninvestible.
The one company I won't invest in is C3.ai (AI 3.02%). Although this stock has been successful in 2023, a few facts bother me about the investment.
C3.ai hasn't always been an AI-first company
C3.ai rose to fame quickly during the AI investment boom earlier this year. A search of "AI stock" in your preferred search engine will undoubtedly yield C3.ai near the top, primarily because of its ticker symbol. This led many investors to pile into the stock without checking out the company first.
C3.ai provides enterprise AI tools, but its platform evolved since its foundation in 2009. At first, it was heavily involved in energy optimization, then transitioned to Internet of Things offerings before ending up at its latest business phase, AI. While business evolution isn't bad when a company changes its name and strategy four times in just under a decade, it makes me question its focus. Now that generative AI has hit the scene, C3.ai is once again shifting its priorities.
This makes me question the company's long-term vision and whether C3.ai will pivot again when the next big technology trend comes around. Another issue I have is its extreme customer concentration. For FY 2023 (ending April 2023), C3.ai has one customer account for 35% of revenue. While it didn't detail its other customer accounts, maintaining its relationship with this one is critical, as this client can sink C3.ai if it leaves.
This kind of concentration worries me. It's a bit like putting your eggs in one basket. If this company's industry turns south, C3.ai would be in trouble. But that's just part of the C3.ai stories; you must also muddy through its financials.
C3.ai is spending like a drunken sailor
For an exciting AI company, you'd think C3.ai would be growing tremendously. However, you'd be wrong. In Q1 of fiscal year 2024 (ending July 31), its revenue grew 11% to $72.4 million. Hundreds of other companies are growing faster than that, but because they don't have AI attached to the company, they don't receive the attention C3.ai gets.
Furthermore, C3.ai is significantly unprofitable, having lost $74 million from operations in Q1. That means C3.ai's operating loss margin is 102% -- indicating it spends double what it brings in for revenue. That's a massive red flag already for me, but with the company having about $750 million in cash and short-term investments on the balance sheet, it can still survive for a couple of years before needing to generate cash or raise some more.
Regardless, C3.ai has a massive hole to dig out of, and I won't invest in it to watch its process. However, the market deems it necessary to slap a premium price tag on the stock at nearly 12 times sales.
AI PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.
Given C3.ai's distance to profitability and slow growth, I'm not betting on its future. While I'm hopeful the company can survive and prove me wrong, it has a massive mountain to climb before it achieves profitability. While the stock may be up more than 150% this year, I think that is mostly due to AI hype and not understanding C3.ai's business. If the stock's movement were based solely on results, it wouldn't trade at its premium.
The market is full of fantastic AI stocks to invest in, but C3.ai isn't one of them.
