C3.ai's (AI 2.10%) stock closed at its all-time high of $177.47 on Dec. 22, 2020. That represented a 333% gain from its IPO price of $42 just two weeks earlier. During those halcyon days, investors were dazzled by its catchy ticker symbol and rapid growth rates, and the buying frenzy in hypergrowth and meme stocks amplified those gains.
But as of this writing, the artificial intelligence (AI) software maker's stock has dropped 40% below its IPO price at about $25. The bulls retreated as its sales growth cooled off, it racked up steep losses, and rising interest rates popped its bubbly valuations. Unfortunately, I believe four major problems could drive its stock even lower this year.
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1. Its joint venture with Baker Hughes will expire
C3 generates about 30% of its revenue from a joint venture with energy giant Baker Hughes (BKR +0.88%). That key deal is set to expire in fiscal 2025, which ends in April 2025, and there's no guarantee it will be renewed.
Instead, Baker Hughes actually renegotiated lower annual revenue commitments in 2021, divested its own equity stake in C3.ai, and invested in C3.ai's competitor Augury. Those bright red flags strongly suggest Baker Hughes will abandon the joint venture or significantly reduce its annual revenue commitments again if it renews the deal.
2. Its moat is drying up
C3 develops AI algorithms that can be plugged in to a company's existing software to accelerate and automate certain tasks. It claims these services can be used to improve employee safety, detect fraud, and help companies streamline their spending.
That sounds like an innovative approach, but plenty of companies provide similar services. UiPath (PATH 0.14%) automates tasks with its software robots, Salesforce (CRM +2.12%) accelerates its cloud-based services with its own Einstein AI platform, and Amazon (AMZN +0.30%) Web Services and Microsoft (MSFT +2.20%) Azure integrate their own AI services into their cloud platforms. C3 could struggle to stand out in that increasingly crowded market, especially if its larger competitors bundle their AI tools with their other cloud-based services.
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3. It's sacrificing margin to board another bandwagon
C3.ai was previously known as C3 Energy and C3 IoT (Internet of Things) before it rebranded itself as an "AI" company. C3 called itself an energy company when the energy sector was hot, called itself an IoT company when everyone was trying to sell IoT devices, and abruptly turned into an AI company to capitalize on the AI boom.
But underneath it all, C3 is still selling a lot of the same machine learning algorithms it previously developed for the energy and IoT markets as "AI" tools. It's also been eager to jump on the generative AI bandwagon with the recent launch of its C3 Generative AI Suite, which provides dozens of generative AI tools for a wide range of industries.
That might seem to be the right move in this evolving market, but it plans to ramp up its R&D and marketing expenses to promote those tools. Last September, it abandoned its original goal of turning profitable on a non-GAAP basis (that's generally accepted accounting principles) by the end of fiscal 2024, which ends this April, in favor of aggressively expanding its generative AI ecosystem. That's a desperate move that tells us it's willing to sacrifice its margins to board the next bandwagon.
4. Its stock isn't cheap yet
C3's revenue rose just 6% in fiscal 2023, compared with its 38% growth in fiscal 2022 and its original outlook for 22%-25% growth. It blamed that slowdown on macro headwinds, which forced many companies to rein in their software spending. However, that slowdown was also exacerbated by a jarring shift from subscription plans to usage-based fees throughout the year -- which it claims was necessary to gain more cost-conscious customers in a tougher macro environment.
C3 claims it can grow its revenue by 11%-20% in fiscal 2024, but we should be skeptical of that outlook after it broadly missed its own guidance for fiscal 2023. For now, analysts expect revenue to rise 15% for the full year.
But with an enterprise value of $2.2 billion, C3 still trades at seven times this year's sales. By comparison, Salesforce and UiPath both trade at about eight times this year's sales -- but they face fewer near-term challenges than C3. So at these levels, C3 still can't be considered a screaming bargain yet.
Stick with the market's better AI stocks
C3.ai still attracts a lot of attention with its ticker symbol, but there are better AI stocks to buy right now. C3 isn't down for the count yet, but its customer concentration issues, unpredictable growth, and steep losses make it a poor investment.
