In the early days of the investor hype surrounding artificial intelligence (AI) stocks last year, C3.ai (AI 3.02%) looked to be one of the odds-on favorites to do well. And while 2023 did turn out to be a good year for the tech stock -- it rallied 157% -- the stock price movement has slowed drastically for several months largely because the company's financials haven't been all that impressive.
C3.ai's stock isn't anywhere near its 52-week high of $48.87. It's down 41% from when it hit that peak last summer. Can it turn things around, or is the stock destined to head lower?
C3.ai's growth rate needs to improve
Investors were bullish on C3.ai's prospects last year because this was a company that provided AI solutions for a variety of different industries. There was the expectation that its growth rate would accelerate thanks to the rising popularity of ChatGPT and AI models.
To its credit, C3.ai's top line has shown improvement, but it hasn't been to the levels investors were likely expecting. Revenue in C3.ai's most recent quarter, which ended on Oct. 31, 2023, totaled $73.2 million and grew 17% year over year. But that was a minor improvement from the previous three-month period when C3.ai's revenue came in at $72.4 million.
For the current quarter, the company projects that the top line will be between $74 million and $78 million. At the low end of the estimate, that could imply another period of minimal quarter-over-quarter growth, and at best, a sequential increase of around 6.5%.
The possibility and hope, however, is that there is more top-line growth on the way. The company says it closed on 62 agreements during the most recent quarter, which included 36 pilots, some of which were with some fairly large customers. That's up from 24 pilots it reported in the previous period. A pilot is the initial C3.ai program a business uses and it helps the business select, configure, and implement the application. This sets the foundation for the deployment of other C3.ai programs the business might need.
Image source: C3.ai earnings presentation.
The company's cash burn shouldn't be overlooked
In addition to a lack of strong growth, investors likely also aren't thrilled with C3.ai's underwhelming cash flow. Over the past six months, the company has burned through $44.7 million in cash just from its day-to-day operating activities. And that figure would be even higher if not for stock-based compensation expenses of more than $104 million. As the company invests more into these AI opportunities, there could be even more need for cash.
As of the end of last quarter, C3.ai's cash balance (including equivalents and restricted cash) was $161.6 million. If C3.ai's cash balance diminishes as it spends more money to pursue deals, that could lead to additional stock offerings, which will dilute existing shareholders and cause more downward pressure on the AI stock.
Is C3.ai stock still expensive?
According to Wall Street, the consensus analyst price target for C3.ai is $28.33, suggesting that it's right around its peak right now. With the company incurring losses totaling $262.3 million over the trailing 12 months and the stock trading at 12 times its trailing revenue, as well as potentially limited growth on the horizon, it's not hard to see why the optimism surrounding C3.ai may have faded, and why the stock could look expensive to many investors and analysts.
Should you invest in C3.ai stock today?
It's time for C3.ai to prove whether it's the real deal and belongs in the discussion with other promising AI stocks. Right now, it hasn't done that. But deals can take time before they materialize and lead to revenue growth.
The safest option for investors is to wait to see whether all those pilots lead to stronger guidance for the business before taking a chance on the stock. As of now, C3.ai is a slow-growing tech company that is also bleeding tons of cash. Until it can change that narrative, investors are better off looking at other, more proven AI stocks.
