Investors piled into the stock of C3.ai (AI 3.44%) following some brighter news. The company reported in its report for the third quarter of fiscal 2024 (ended Jan. 31) that it closed 50 new agreements and said that it expected higher revenue for the fiscal year.
But does that make the stock a buy? Financial struggles and concerns about key clients have often weighed on investors' minds, and they may wonder whether improvements address those concerns. Thus, investors need to look at C3.ai with a discerning eye to see if it can justify its higher stock price.
C3.ai's improvements
C3.ai specializes in enterprise AI. Such software packages are designed to meet the needs of clients in a variety of applications.
The company has also capitalized on this opportunity by applying generative AI applications. This allows the software to "learn" the patterns it discovers by applying its tools to massive data sets.
Various clients ranging from the U.S. Army to building technology company Johnson Controls International to oil field services provider Baker Hughes rely on tools provided by C3.ai.
Hence, the fact that the company closed on 50 contracts in the last quarter is notable. It also reported record bookings for its state and local government suite of applications, and its partner-supported bookings rose by an astounding 337%.
That news likely played a role in the C3.ai stock price rising by nearly 70% over the last year. Also, despite that increase, it sells at a price-to-sales (P/S) ratio of around 15. Given the valuations of many AI stocks, investors may not necessarily balk at paying such a multiple.
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Why some investors might hesitate to buy C3.ai stock
Nonetheless, for all the improvements, many of the ongoing struggles continue. In the first nine months of fiscal 2024, revenue was $224 million, a yearly increase of 15%. While that represents significant growth, it lags the growth rate of many other up-and-coming AI stocks.
Moreover, the total operational expenses during the first three quarters of fiscal 2024 came to $363 million, 62% more than the company's revenue. Hence, the losses for the period came to $207 million, a slight increase from the $204 million loss in the same year-ago period.
C3.ai holds about $723 million in liquidity, so it is not yet in financial trouble. Still, if the company does not reduce the losses, it may have to turn to share issuances to stay in business. The company issued nearly 8 million shares over the last year, and given the rising stock price, that could continue. Such actions could bode poorly for shareholders if the stock price were to turn the other direction.
Avoid C3.ai stock
Considering the state of C3.ai stock, its negatives appear to outweigh any positive attributes. Indeed, the company seems to have succeeded in enrolling more clients, and with its focus on AI, the stock may have become more popular with investors.
However, the size of its operating expenses compared to its revenue is alarming and leaves the company with no obvious path to achieving profitability. A high share price could facilitate more share issuances to increase its liquidity. Still, such a move reduces shareholder returns, and should investors lose confidence in the stock, C3.ai could fall into dire financial straits.
Ultimately, investors have numerous choices when it comes to AI stocks. With C3.ai's precarious financial situation, investors have safer and possibly more lucrative choices when it comes to AI investing.
