Since ChatGPT showed up on the scene, it seems like every stock associated with artificial intelligence (AI) in some form has attracted buyers. Indeed, artificial intelligence is changing the face of the tech industry, and some companies will likely experience massive gains as the technology changes the way we live.
However, this does not mean every AI stock is going to deliver outsized returns. In fact, some stocks should arguably be avoided, including enterprise AI software company C3.ai (AI +1.83%). Here's why I'm keeping it off my buy list and encouraging others to do the same.
The state of C3.ai
If you take an overhead view of C3.ai, you can understand why AI investors like this stock. The company develops and sells software applications powered by AI. It also places considerable emphasis on generative AI applications.
Through this technology, it has attracted a diverse client base that includes companies as varied as Microsoft, RTX, and Baker Hughes as it tackles various business-related challenges through AI.
However, C3.ai's revenue base appears to be excessively dependent on specific companies. It currently generates around one-third of its revenue from Baker Hughes. That agreement ends in fiscal 2025, and since it is unknown whether Baker Hughes will renew the deal, C3.ai faces significant uncertainty.
Furthermore, the company's propensity to change its name calls its mission into question. Its original name at its founding in 2009 was C3 LLC. It became C3 Energy in 2013, and in 2016, when the Internet of Things (IoT) gained more attention, it changed its name to C3 IoT. Three years later, it rebranded under its present name, C3.ai, before launching its initial public offering (IPO) the following year. Given such changes, one might question how committed the company is to the technology.
How C3.ai fares financially
Also, given the state of its financials, one might wonder whether it has a realistic path to profitability. In the first two quarters of fiscal 2024 (ended Oct. 31), revenue came in at $146 million, a yearly increase of about 14%.
Unfortunately, a near doubling of subscription costs more than wiped out the benefits of the higher revenue. Thanks to higher interest income, the net loss in the first half of 2024 fell to $134 million, a modest improvement from the $141 million lost during the same time frame in fiscal 2023.
Admittedly, its $762 million should keep the company in business for the foreseeable future, possibly without more debt or further stock dilution. Nonetheless, given the marginal improvement in net losses, one has to wonder if C3.ai can grow enough to become profitable.
Also, its stock has struggled in the second half of 2023. Although it rose by around 160% over the last year, that includes a decline of nearly 30% in the previous six months. And its price-to-sales (P/S) ratio of more than 11 makes it a relatively expensive stock. Such a valuation could limit the upside without a dramatic improvement in its business.
NYSE: AI
Key Data Points
Avoid C3.ai stock
Despite C3.ai showing outward appearances of a promising AI company, a deeper look at the company indicates some troubling problems that should make investors think twice about buying in. Aside from its frequent name changes, the company seems incapable of generating the growth it needs to remain profitable. Moreover, the recent stock price behavior and valuation indicate the stock may have peaked.
AI is likely going to generate considerable returns for investors over time. Nonetheless, investors may want to ignore C3.ai in favor of profitable companies that have consistently focused on artificial intelligence.
