Since the generative artificial intelligence (AI) chatbot ChatGPT hit the scene in late 2022, investors have scrambled to stake their claim on what promises to become a revolutionary growth opportunity. With its shares up by a whopping 162% year to date, C3.ai (AI 3.02%) has been a big beneficiary of this trend in 2023.
Does the company have what it takes to maintain its near-term success over the next half-decade? Let's take a look.
What is C3.ai?
C3.ai is a company in flux -- constantly shuffling its strategy to match the latest technology trends. This started with emissions reduction and clean energy, then the Internet of Things (IoT), and finally artificial intelligence. Management has repeatedly changed the company's name -- from C3.energy to C3.IoT and, finally, C3.ai to match its evolving focus.
But despite this perhaps sketchy pattern of name and strategy changes, C3.ai seems to have finally found a business it is willing to stick with. Right now, the company provides over 40 enterprise-focused AI applications designed to help public- and private-sector organizations unlock operational efficiencies. Notable clients include the United States Air Force and energy company Shell, which both use its software to predict system failure in their operations and equipment.
It is important to note that C3.ai's software seems more related to data mining and machine learning (recognizing patterns in large volumes of information) than the generative AI behind conversational chatbots like ChatGPT. And while management is implementing new generative functionality, overall company performance remains lackluster.
Lackluster operating performance
C3.ai's fiscal second-quarter results show little to justify its stock's explosive returns in 2023. Revenue increased by 17% to $73.2 million based on increasing subscription revenue from the company's enterprise software as it added new customers and reported increased interest in its generative AI offerings, which can help clients quickly locate, retrieve, and interpret the information generated by its data mining tools.
That said, C3.ai's bottom line remains weak, with its operating loss rising from roughly $72 million to $79 million in the second quarter -- a 10% year-over-year increase.
With a whopping $762 million in cash and marketable securities on its balance sheet, C3.ai is in an excellent position to sustain its cash burn well into the future. But with such a modest growth rate, the company looks unlikely to scale its way out of the problem any time soon. And increased research and development costs associated with new generative AI investments could make the cash burn even worse before it gets better.
Image source: Getty Images.
What could the next five years have in store?
C3.ai may struggle to justify its valuation in the next few years. With a price-to-sales (P/S) multiple of 12, shares are valued significantly higher than the S&P 500 average of 2.6. This lofty valuation looks far too rich to pay, considering the company's modest growth rate and continued cash burn.
Over the next five years, share price growth may lag the market as AI-related hype dies down and C3.ai stock's performance becomes more dependent on its operational growth and profit potential.
But while C3.ai doesn't look like a solid buy right now, that doesn't necessarily make it a bad company. The stock could become more attractive if its valuation becomes reasonable. Keep an eye on C3's financial growth trends and compare them to the stock chart in 2024 and beyond.
