C3.ai (AI +1.83%) has been one of 2023's top-performing artificial intelligence (AI) stocks. It's up around 180% this year, but is down about 30% from its high set in June. With 2024 shaping up to be another strong year for AI-related companies, investors may wonder if this is a buying opportunity for C3.ai.
The government is becoming a large C3.ai customer
C3.ai specializes in plug-and-play AI solutions for enterprise-level customers. With products ranging from energy management, demand forecasting, and anti-money laundering, C3.ai has solutions spanning multiple industries.
However, one of C3.ai's most lucrative clients in recent quarters has been the federal government. In its fiscal 2024 second quarter, which ended Oct. 31, 49% of bookings came from its federal, defense, and aerospace segment. In Q1, that share was 67%. Clearly, C3.ai's relationship with the U.S. government is a vital part of its business, making this a key metric to watch.
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It also reflects the company's diversification away from the oil and natural gas industry, which accounted for 34% of bookings in its fiscal 2023. (That year, federal, aerospace, and defense was 29%.) This is good, as oil and natural gas industry spending has dried up for C3.ai. In its fiscal Q1, only 1.5% of its bookings came from that space, and it reported no explicit bookings from it in Q2, though the results possibly landed in the "others" category, which comprised 0.1% of bookings.
This shouldn't come as a surprise, as a short report in 2023 alleged that C3.ai's partnership with oil and natural gas giant Baker Hughes was "falling apart." The most recent data from C3.ai's earnings reports seem to confirm this (we'll need to wait a full fiscal year for complete clarity due to the company's sales cycles), but with C3.ai's government contracts making up the ground, the loss of that business isn't dealing as severe a blow to its finances as it otherwise might.
Still, it shows that C3.ai has once again become dependent on a single client -- a massive risk source if the relationship sours.
Speaking of finances, C3.ai's are... interesting.
C3.ai spends a lot of money on a relatively low growth rate
Given that it's an AI-based company, you'd expect C3.ai would be growing rapidly, but that's far from the truth. In fiscal 2024 Q2, its total revenue rose 17%, with subscription revenue only rising 12%. It also guided for $76 million in revenue for fiscal Q3 -- about a 14% growth rate. While that's still market-beating growth, it isn't as fast as many would expect for a major player in a growing industry.
That growth rate also isn't going to cut it, as C3.ai is deeply unprofitable.
In fiscal Q2, C3.ai's cost of revenue and operating expenses totaled $32.1 million and $120.5 million, respectively. With $73.2 million in total revenue, its operating loss margin was 108%. So, with C3.ai spending more than double what it brings in, it has a long way to go before it breaks even.
Although management has forecast that the company will produce positive free cash flow in fiscal 2025, that assertion comes with a big asterisk. C3.ai shelled out $53.2 million in stock-based compensation in Q2, or about 73% of revenue. While this is technically a non-cash expense, the dilution caused by its increasing share count is harming shareholders.
Over the past three years, C3.ai's share count has risen by 19%. That means that, as an ownership slice of the company, a share purchased three years ago is now worth about 84% of what it was at that time.
Despite all of that, C3.ai still trades at about 13 times sales.
AI PS Ratio data by YCharts.
The current valuation the market is giving to C3.ai's stock is far too high for a company growing at the pace it is. Furthermore, with its deep unprofitability and massive stock-based compensation bill, it should trade at a much lower valuation.
If you want to invest in AI stocks, there are multiple better options available than C3.ai.
