C3.ai (AI +2.02%) was a fairly popular artificial intelligence (AI) stock back in 2023 when the AI investment wave began. The two letters in the company's name and ticker symbol prominently tell any investor or client what it specializes in. As a result of the AI investment wave, many people have piled into C3.ai's stock, although the popularity has waned (which is evidenced by its declining trade volume).
I think investors need to exercise some caution with C3.ai. There are three things I would be concerned about if I were an investor in the stock.
1. Artificial intelligence is not C3.ai's first industry
The most successful companies (and investments, for that matter) dominate their niche industry and then expand into other areas. Just look at giants like Apple, Microsoft, and Amazon. These three started with something very specific, then added more products and offerings to eventually become what they are today.
C3.ai is taking the opposite approach, and that's not a positive sign for me. When C3.ai was founded in 2009, it was known as C3. It was focused on energy management solutions but then changed its name to C3 Energy in 2013 to convey its expansion into energy grids. In 2016, the Internet of Things (IoT) was a huge investment theme, so it switched its business to become a platform that would utilize IoT devices to help predict what a business's needs would be.
NYSE: AI
Key Data Points
Then came C3.ai, its current iteration. It switched the name because it wanted to let customers know it was in the sensor business; it was in the AI software business to manage these IoT devices. Now, with the popularity of generative AI, it's working on incorporating that technology into its product offering.
C3.ai has done a great job of hopping from one solution to another but has yet to find an industry in which it fully thrives. Despite being 15 years old, C3.ai's trailing-12-month revenue is just shy of $300 million. Compare that to other software companies that succeeded in their niche and then expanded to other segments, like CrowdStrike (founded in 2011) or Snowflake (founded in 2012), which each have generated around $3 billion in trailing-12-month revenue. C3.ai leaves a lot to be desired.
2. C3.ai is about as far away from profitability as you can get
If your personal finances looked like C3.ai's, you'd be in bad shape. In the third quarter of fiscal 2024 (ended Jan. 31), C3.ai brought in $78.4 million in revenue. However, when its expenses are totaled up, C3.ai has a net loss of $72.6 million. That means C3.ai is spending nearly twice what it brings in, a huge warning sign for investors.
It also hasn't displayed any urgency to improve its financial position as its profit margins have barely budged in the past few years.
AI Profit Margin (Quarterly) data by YCharts
C3.ai has a massive hole to dig itself out of before becoming profitable again. While it may eventually be able to do so, it will take a few years.
3. C3.ai is still heavily dependent on one client for business
Lastly, C3.ai has some hefty revenue concentration. At the end of fiscal 2023, one customer accounted for 35% of C3.ai's revenue. This client is undoubtedly Baker Hughes, an oil and gas product and service supplier.
C3.ai has a long history with Baker Hughes that began in 2019, and management has been fairly up front about this concentration. They have reworked their deal a few times and are currently on a deal that is set to expire in June 2025, although there are options to extend the contract for additional years.
Still, regardless of how healthy a critical partner is, it's always a concern. Should there be a massive drop in oil prices, Baker Hughes may struggle and hurt C3.ai. Additionally, Baker Hughes may choose not to renew its contract next year, which would eliminate a sizable chunk of C3.ai's revenue.
C3.ai may have solid products, but its history and finances concern me. Add in heavy dependence on one client, and the whole investment thesis looks ready to crumble. C3.ai may become a successful investment or stock, but there are too many other investment opportunities available to take a risk on C3.ai.
