As we start 2024, I think it's safe to say that artificial intelligence (AI) has entered the mainstream. The popularity of OpenAI's ChatGPT and other generative AI applications captivated millions of people, and many companies even remotely dealing with AI have seen their stocks soar because of it.
A key beneficiary of the AI hype has been C3.ai (AI 3.02%), which, as you can see, has an appropriately named ticker. C3.ai creates enterprise AI products that companies and institutions across many industries and governments use for their own operations.
C3.ai's stock price finished 2023 up 156% for the year, but it still hasn't made up for its troubles since its December 2020 initial public offering -- it's lost around 75% of its value since then. Stock price aside, however, growing interest in AI has brought renewed attention to the company.
For investors wondering if it's too late to invest in C3.ai after its huge 2023 rally, the answer largely depends on your investing horizon.
There are financial risks to consider with C3.ai
Despite the hype surrounding C3.ai this year, the attention hasn't translated to its balance sheet just yet. C3.ai made $73.2 million in revenue in the second quarter of its fiscal year 2024 (ended Oct. 31). That was a 17% year-over-year (YoY) increase, but far from impressive for a growth company of C3.ai's valuation.
Its gross profit margins also headed in the opposite direction, dropping from 67% to 56%. It has around $762 million of cash reserves, so it's not in danger of running out of money, but it's still not encouraging to see the gross profit margins and free cash flow (-$55.1 million in the second quarter) where they are.
AI Gross Profit Margin (Quarterly) data by YCharts
Looking past the actual revenue numbers, a cause for concern is how much of C3.ai's revenue a handful of companies account for. Oil company Baker Hughes is by far C3.ai's biggest customer, accounting for almost a third of its revenue in its latest quarter.
Any disruption or change in that relationship could take a major toll on C3.ai's finances going forward.
There's a premium to be paid for the stock right now
It's not uncommon for growth stocks to have higher valuations than other stocks. The thought is that you pay a premium for future revenue and profit potential. With a price-to-sales ratio of 11.6, C3.ai is valued much cheaper than its average since going public, but it's still a bit higher than preferred for a company only growing revenue 17% year over year.
AI PS Ratio data by YCharts
If C3.ai had a clearer plan for a revenue boost its valuation would be easier to ignore, but I think big tech's resurgence into AI puts into question just how well C3.ai and its applications will hold up competitively long-term. Microsoft, Alphabet, Amazon, and other top names are releasing competing products that will only put more pressure on C3.ai.
It's best to ease your way into a stake in C3.ai
I'm not writing off C3.ai, because the company could still pan out if its products prove to be competitive as more companies enter the field. However, there are short-term risks that are hard to ignore. For investors with a relatively short horizon, I wouldn't recommend C3.ai right now.
For investors with more time, dollar-cost averaging your way into a stake of C3.ai would be a smart route. The stock has shown that it's prone to wild swings in both directions, so dollar-cost averaging will help protect you against investing a lump sum right before a drop.
How C3.ai's business holds up long-term remains to be seen, but if you're easing your way into a stake, you can get more of a gist as time goes on and adjust accordingly.
