C3.ai (AI 3.25%) has risen and fallen several times since the artificial intelligence (AI) arms race kicked off in 2022. Right now, C3.ai's stock is in the falling stage, around 50% off its all-time high, although it nearly notched a new all-time high at the end of 2024. However, some investors think that C3.ai is a phenomenal under-the-radar AI stock that could provide massive returns if bought now.
Is this true? Or is there something else going on with C3.ai's stock?
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C3.ai has clients in many industries
C3.ai's approach to the AI industry is to offer its clients plug-and-play AI models that can be easily adapted to multiple industries. During Q3 FY 2025 (ending Jan. 31), its largest bookings were from professional services and federal defense clients. However, in Q3 FY 2024, the largest bookings came from state and local government entities. So, C3.ai's target audience can vary from quarter to quarter, depending on when various contracts or trials lead to full sales.
There is a huge market for C3.ai's plug-and-play solutions, as many clients lack the engineering power to implement and maintain AI solutions across a business or government service. Furthermore, they don't want to spend the money it takes to hire a consulting firm to do the work for them. This area in the middle is where C3.ai shines, leading to strong growth.
C3.ai's revenue increased 26% year over year to $99 million in Q3. The company also provided solid guidance for Q4, with management expecting $109 million in revenue, indicating they will maintain their 26% growth pace.
Despite this strong growth rate, C3.ai doesn't trade for a huge premium valuation that many of its software peers are valued at. At less than 10 times sales, C3.ai can be considered a fairly cheap software stock.
AI PS Ratio data by YCharts
If you just had C3.ai's product offerings, growth rate, and valuation, you may think this is about as no-brainer of a buy as it gets, but there is something that investors need to be aware of, and it's the reason why the stock is so cheap.
C3.ai is a long way away from breaking even
C3.ai isn't profitable, which shouldn't surprise investors who dabble in the software space. Many of these companies are sacrificing short-term profitability for long-term market share, which is a smart business move. However, there's a limit on how unprofitable a company can be, and C3.ai has crossed that line.
Although C3.ai's operating margins have "improved" over the past three years, its operating expenses remain nearly double its revenue.
AI Operating Margin (Quarterly) data by YCharts
Wall Street analysts expect about 20% revenue growth for FY 2026. If C3.ai held its expenses constant and grew revenue at a 20% pace for the foreseeable future, it would take a little over two years for its revenue to reach a point where it would be equal to operating expenses. That doesn't include the cost of revenue, so the actual time frame is even longer than this.
As a result, many investors are steering clear of the stock, as C3.ai hasn't made any significant strides toward profitability even when many other software stocks have slashed expenses and maintained growth to reach that level.
C3.ai could be a solid stock if it decided to mature and turn a profit. However, it's a long way away from that, and management doesn't seem interested in it, either. As a result, I think investors should examine some more profitable ones (or at least teetering on profitability), as there are plenty of great options out there.
