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C3.ai stock is UP 173% YTD so it begs the question “How high will it go next year?” That question and anticipated positive answer might seem justified but a review of the company’s business performance reveals that major challenges lurk just below the surface.
C3.ai Expects New Business Model Will Generate Major Increase In Revenue
C3.ai () is transitioning from subscription-based revenue to a consumption-based model instead whereby, under the new model, businesses can come and go as they please, paying only for what they use. The company offers 40 turnkey, customizable applications for businesses across 10 industries allowing them to access AI reliably without having to build models from scratch. The shift in strategy has led to a temporary slowdown in C3.ai’s revenue but, as illustrated in the graph below, consumption revenue is expected to ramp up around the middle of next year (Q7).
IMAGE SOURCE: C3.AI.
C3.ai Faces Major Challenges
According to Keithen Drury of the Motley Fool (see ), however:
C3.ai has lacked consistent focus since its foundation in 2009. At first it was heavily involved in energy optimization, then it transitioned to an Internet of Things offering, then it transitioned to providing enterprise AI tools and, as mentioned in the introduction, it is now transitioning from subscription-based revenue to a consumption-based model. That looks like a good move as illustrated in the graphic above BUT shifting its priorities once again makes Drury question the company’s long-term vision and whether C3.ai will pivot again when the next big technology trend comes around.
C3.ai has extreme customer concentration with one customer accounting for 35% of revenue and were this customer to leave C3.ai it could quite possibly sink C3.ai.
C3.ai revenue only grew 11% during Q1 2024 (see here) and Drury points out that hundreds of other companies are growing faster than that, but because they don’t have AI attached to the company, they don’t receive the attention C3.ai gets.
C3.ai management is projecting only 19% revenue growth in Q2 2024 (to be reported on December 6th) and just 15% for the full fiscal year.
C3.ai remains significantly unprofitable having lost $74 million from operations in Q1 – an operating loss margin of 102% – indicating it spends double what it brings in for revenue. Drury sees that as a massive red flag, but acknowledges that, with the company having about $750 million in cash and short-term investments on the balance sheet, it can still survive for a couple of years before needing to generate cash or raise some more.
C3.ai is a long way from profitability, given its slow growth and Drury concludes that
C3.ai’s stock high price is mostly due to AI hype and investors not understanding C3.ai’s business and, if the stock’s movement were based solely on results, it wouldn’t trade at such a high premium.
C3.ai Valuation Metrics
C3.ai has yet to turn a profit and, as a result, the only valuation metric to report on is that based on its current and forward price-to-sales ratios as follows.
Its current price-to- sales ratio (PSR) is 12.1x which is 359% above the sector median of 2.6x)
Its forward price-to-sales ratio (PSR) is 11.4x which is 331% above the sector median of 2.6x)
(Please note that the above metrics – see definitions at end of article – change daily with the change in SMCI’s stock price.)
Stock Price Forecast
Analysts expect C3.ai to increase revenue by 15.4% to $308 million in fiscal 2024 and by 20% to $369 million in fiscal 2025. Priced at 10x forward sales, AI stock trades at a premium, given its negative profit margins. The 12 analysts offering 12-month price forecasts for C3.ai Inc have a median target of $27.50, which only represents a 9% increase from today’s closing price. ()
Conclusion
In a time of unprecedented demand for AI, C3.ai should be reaping the rewards of the market from which it took its name but, given the above evidence, however, investors should look elsewhere to profit from this trend concludes The Motley Fool.
Analyst Commentary
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C3.ai Upgraded by Oppenheimer to “Outperform”
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