Is C3.ai (NYSE:AI) a buy right now? Is it the best way to invest in the artificial intelligence megatrend that has emerged with the onset of ChatGPT and Bard? Or is it a meme stock having a hot run?
In today’s world, we have seen AI go from an abstract theory to a tool that everyday consumers can leverage thanks to the release of ChatGPT. It has gone from solving complex problems behind the scenes to answering questions about cake recipes and writing college essays.
Andreessen Horowitz quotes a 2016 Jeff Bezos Amazon (NASDAQ:AMZN) shareholder letter when summarizing what AI is.
“Over the past decades computers have broadly automated tasks that programmers could describe with clear rules and algorithms. Modern machine learning techniques now allow us to do the same for tasks where describing the precise rules is much harder.”
Clearly, AI is transformational technology. But does that mean C3.ai is a buy? Let’s dive in.
Pro No. 1: C3.ai Has an Experienced Founder
One of the biggest reasons to like C3.ai is that it has a strong leader at the helm. C3.ai was founded by Thomas Siebel, who is famous for selling his company Siebel Systems to Oracle (NYSE:ORCL) for $5.8 billion. At the time, this was one of the largest transactions of its kind.
Broadly, Siebel is a skilled operator who has over 30 years of experience in the business solutions and software spaces, which is a skill that is hard to master.
Siebel also is a firm believer in employee up-skilling. C3.ai encourages internal development of its employees, paying for them to take courses in computer science and awarding them a 15% raise upon completion, as well as a bonus and more stock options. With this type of company culture, C3.ai is showing that it is willing to invest in its employees and may well reap the benefits in the future. This could be subtly reflected in the stock price because in tech, there is a war for good talent.
Pro No. 2: There Is a Rapidly Growing AI Market
Current estimates for the total addressable market for AI range from the hundreds of billions to trillions of dollars. For the sake of this argument, let’s take one of the more conservative estimates. According to Bloomberg:
“The global artificial intelligence (AI) market was valued at nearly USD 59.67 billion in 2021 and is estimated to expand at a compound annual growth rate (CAGR) of 39.4 percent to reach USD 422.37 billion by 2028.”
If C3.ai can capture just 1% of this 2028 market on a revenue basis, that translates to $4.22 billion.
This is a far-out target, but each incremental step closer to this over the next two years would most likely move the stock. The market also has room for many players, as AI is set to change how the consumer, business, and government worlds function.
The incentive to increase AI adoption is not just about accuracy and speed of complex tasks, but also of cost reduction, as more AI-enabled devices mean less human labor needed for those jobs. The largest and most reliable sector outside of large governments will be the business enterprise clients, which have large coffers and are constantly in a battle with each other to increase margins and speed up organizational processes.
Pro No. 3: C3.ai Caters to Enterprise Customers
The last reason that suggests C3.ai is a buy is that the company is firmly in the enterprise space. It prioritizes large businesses with less tech-forward operations. These are companies that do not want to build out their own Ai capabilities from scratch. Some focuses of C3.ai’s offerings are:
- C3 AI Suite: A platform-as-a-service application that enables customers to create their own specific AI applications for their business.
- C3 AI Inventory Optimization: Track inventory and inventory inputs across an organization.
- C3 AI Predictive Maintenance: Helps companies understand which of their machinery and other assets may need to be fixed or updated.
- C3 AI Fraud Detection solution: Enables companies to find places where they are losing revenue to adversarial actors.
- C3 AI Energy Management: Helps large businesses manage their energy output and intake.
C3.ai clearly touches many angles of AI, which makes it a potentially compelling investment. If it can become the dominant player in just one of these areas, there is no reason the stock cannot see significant upside.
Con No. 1: The Stock has Already Doubled
However, not everything is attractive when it comes to AI stock. C3.ai has already doubled since the beginning of the year. Shares have gone from roughly $10 to $24 in just the past month and a half.
Canaccord Genuity analyst Kingsley Crane, who covers AI companies, was skeptical about the change in valuation when speaking to CNBC earlier this week. He has a price target of $14 on the stock and recommends a “hold” on the security.
Buying into such a rally right now is dangerous because of the uncertainty about how the overall market will behave. Growth and tech-focused stocks have performed quite well so far in 2023, but a pullback may be coming as investors look to consolidate gains.
Any large shock to the market could send AI stock shooting downward as earlier investors rush for the exits and realize their profits.
Con No. 2: C3.ai Has Unusually High CFO Churn
Since C3.ai came public in 2020, there have been 3 CFOs in 17 months. This is generally a bad sign, and worse, each one has had a different metric for reporting their customer count and growth.
David Barter was the CFO from the time of the IPO through December 2021. He reported the total number of customers, and was showing a high growth rate of 47% for fiscal 2021 with a total of 89 customers.
He resigned and Adeel Manzoor stepped up to the plate, changing the way customers were recognized again to include all divisions of all entities, changing the total customer count to 218. This brought the growth rate to an 82% clip, much better than the previous stat. He himself resigned after three months in February 2022. Since then, the company has hired Juho Parkkinen for the job, who revised the customer count to the previous system, showing 48% growth in fiscal 2022.
The switching of reporting metrics should give investors pause, as confidence in the reporting figures of a company is hugely important for those that are evaluating a stock.
Con No. 3: The Company Is Burning Cash Quickly
C3.ai has been increasing its net losses every quarter and year, finishing out its most recent reported quarter with a net income loss of $140 million for the past six months. This grew significantly from the prior-year period, and is the result of both more loss-making activities and increased stock-based compensation. This compares with a cash position of $840 million.
This is a dangerous trend for a company like C3.ai because loss-making companies do not fare well in the rising-rate environment we are currently in. If the company continues to burn through its cash and does not come closer to profitability, then that could mean it needs to go to the capital markets for assistance.
This would be an expensive proposition for a company like C3.ai, as it would probably get a much higher borrow rate given the riskier nature of the business. Further, a transaction like this on the equity side could significantly dilute the shareholder base.
This would cause the stock to plummet both on the indications about its financial management and also in the technical sense of dilution.
Is C3.ai a Buy? Wait for More Information.
My verdict is that no matter hard it may be not to feel FOMO, stay on the sidelines of AI stock for now, and wait for more affirming news to come out about the company. If it truly lives up to the hype, then over a long period of time you will not miss out on the large gains this company could make. If you insist on buying it now though, I would recommend scaling in the position on pullbacks and positive news, dollar cost averaging into a position.
On the date of publication, Alexander Wah did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.