C3.ai (NYSE:AI) stock has had an interesting run.
Previously known as C3 IoT, the company has evolved to tap into AI technology trends, shifting its focus from energy-emissions tracking and IoT to meet the rising demand for AI solutions.
A higher-risk option for investors looking to ride the secular tailwinds AI and automation provide, C3.ai remains a top pick for many fund managers right now.
The company, aptly represented by the symbol AI, surged 182% this year, challenging Nvidia’s (NASDAQ:NVDA) performance. However, this significant gain may be attributed to hype and retail investor excitement over fundamental growth.
C3.ai operates in the enterprise AI sector, but as a newer company that went public in 2020, it has yet to achieve profitability.
Let’s dive into what investors should make of this AI-focused automation company.
The Problems Are Real with AI Stock
C3.ai deploys AI algorithms to automate tasks, enhance safety, and detect fraud within an organization’s existing software setup. The company caters primarily to large enterprises and government clients, with strong revenue growth seen in recent years in the double-digit percent range.
However, while the company grew its top-line 17% in fiscal 2021 and 38% in fiscal 2022, C3.ai saw more modest growth in 2023, of only 6%. Thus, despite the company’s valuation, which prices in significant and sustained higher-than-average growth, the company has produced relatively underwhelming numbers of late.
Companies have been reducing spending because of economic uncertainties. Plus, the shift from subscription to usage-based pricing lowered revenue and customer retention. Thus, the company’s growth has slowed, and remaining contract value dropped for five consecutive quarters.
Investors are now left in a rather difficult position of determining whether growth will re-accelerate, or if this valuation is unrealistic.
AI Stock Continues To Surge, Regardless
C3.ai, while unprofitable, has seen its share price surge 182% this year. Strong earnings reports and a focus on enterprise AI are driving its growth.
The company aims to achieve profitability by the end of 2024. The next earnings report is due in short order, and should provide an indication of whether C3.ai is able of achieving this goal in a reasonable amount of time.
Management forecasts full-year sales between $295 million to $320 million, with the midpoint showing a 15% annual increase. After modest revenue growth last year, the company’s growth appears to be accelerating, yet the stock remains risky.
C3.ai faced growth challenges amid a business model shift. While its Generative AI product gained traction with three post-Q4 deals, its financials pose challenges. Morgan Stanley’s (NYSE:MS) AI bubble theory, based on Nvidia’s significant surge, could affect C3.ai given its larger gains.
However, some analysts maintain a positive outlook on AI stock, with several recent price targets surpassing the current trading level.
Despite AI stock’s recent climb, the consensus price target suggests potential downside, which affects the overall bullish argument for the stock.
C3.ai holds long-term potential despite recent setbacks. While it has faced losses, the company expects non-GAAP profitability in the current fiscal year.
Financially, C3.ai is seeing some improvement, and has a reasonably strong balance sheet ($790 million in cash and no debt). That said, that AI stock trades at more than 11-times sales is going to be hard for even the most ardent growth investor to justify.
In the long-term, valuations matter. For now, the market appears to be focused more on the artificial intelligence narrative than the numbers. But I’m just not so sure this sort of stock price appreciation AI stock has seen this year can continue forever, if the laws of finance still hold true.
On the date of publication, Chris MacDonald did not have (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.