Is C3.ai a Good Stock to Buy, or Just a Bubble?

The AI software company C3.ai has once again found itself striking gold, by being at the right place and the right time — in the midst of this Artificial Intelligence (AI) revolution. After a more than 260% year-to-date performance, investors are wondering, “Is C3.ai a good stock to buy, or just a bubble?”

Well, read on for our analysis!

What Is C3.ai Stock? Their Rise to Fame

C3.ai was listed on the New York Stock Exchange in end-2020 at a listing price of $42, but have garnered so much public interest that the stock soared more than 140% to $100 at the open, and even to as high as $161 per share two weeks later. 

Source: Google Finance

C3.ai’s story is relatively simple. It was an up-and-rising cloud-based AI company that had huge potential. Most investors back then already had a vague idea of what AI can do; improve efficiencies, streamline processes, optimize cost, derive data-driven insights, etc.

C3.ai’s annual revenue growth rates until FY2020 (FY starts on May 1st)

C3.ai’s growth rate pre-IPO also reflected a very promising story. They had notable names like Caterpillar and Baker Hughes as their core clients.

I mean, their stock ticker symbol is AI. How much more AI can a company get?

However, some might not know that C3.ai did not start out with a focus on AI. The company was originally named C3, with a focus on measuring, mitigating and monetizing carbon — hence the name. They then transited to C3 Energy for a short period of time.

Subsequently in 2016, the company changed its name to C3.IoT and started offering solutions like cloud computing, data analytics, AI, etc. It came at a time where IoT (Internet of Things) was a popular buzzword amongst investors. 

Ultimately, they settled for a third name change to C3.ai, to better attract investors’ attention — sorry — I mean, to better encapsulate their core business. 

This history of frequent name changing to coincide with the “trend of the day” certainly raises alarm bells.

C3.ai Stock: Buy or Sell?

Despite C3.ai's recent stock rally in 2023, it is still down more than -75% from its all-time highs. Interested investors are probably wondering if this is a good time to enter. 

I will seek to present both the bullish and bearish side of the argument around C3.ai’s stock today, coupled with my overall opinion of the risk-reward opportunity at the end.

C3.ai Stock Bull Thesis

#1: Incredible Growth Tailwind in the AI Market

Considering that C3.ai is in the business of assisting enterprises to harness AI capabilities, they are poised to capitalize on the tremendous growth opportunity in the AI market, which is projected to reach $383.3 billion by 2030 with a compound annual growth rate of 21.4%.

Source: GlobalData Thematics Intelligence Centre

As businesses increasingly implement AI-driven solutions, C3.ai’s cloud-based platform offers scalable and customizable solutions that address industry-specific challenges.

Sitting on this incredible tailwind alone allows for any AI-related company to penetrate into an ever-increasing demand. Assuming that they are able to hold their current market share, their baseline growth rate would probably grow in tandem with the broader market demand.

That said, I think investors should still keep close track of C3.ai’s execution ability as companies might still fall behind, even in a growing industry.

#2: C3.ai’s Growing Partner Ecosystem

Source: C3.ai FYQ4’23 Investor Presentation

Despite Cloud Service Providers like AWS and Azure offering their own integrated AI services, C3.ai continues to draw in new customers and clientele via joint partnerships. 

Through their expansion plans, C3.ai is slowly developing their brand equity in the space, building up their reputation as a credible partner to enterprises that require analytics/AI capabilities. 

These various partnerships also allowed C3.ai to onboard more customers over the quarters, while perking the interest of potentially new customers with the increased qualified pipeline customers (more than 100%+ in the last 12 months).

Source: C3.ai FYQ4’23 Investor Presentation

C3.ai Stock Bear Thesis

#1: Significant Slowdown in Growth Rates

C3.ai’s annual revenue growth rates until FY2024 (FY starts on May 1st)

Despite the great optimism behind the adoption of AI capabilities, it did not translate to cold, hard numbers for C3.ai’s stock. In their latest earnings (31 May), management only guided revenue growth to be around 11 to 20% for the fiscal year, next 12 months.

This guidance came in a little disappointing, as compared to their growth rates pre-IPO, and when cross-referenced to the overall AI market growth, it might seem underwhelmingly low — given the small base C3.ai is growing from. 

Further, if we were to look at the growth trend of C3.ai post-IPO, investors might be skeptical if they are really the AI company that is able to exploit and ride onto this new wave of innovation. That said, the stock market still rewarded them with an insane rally this year because most might think that C3.ai is able to easily beat the guidance of 11 to 20% in this new AI revolution as more companies start to pick up the slack.

#2: C3.ai is HOT TRASH!

When diving into C3.ai’s financials, we were shocked. 

We understand that we need to adopt a different lens when looking at companies in the very nascent stage of their development, but the profit profile of C3.ai looks slightly ridiculous.

Despite them boasting a 74% Non-GAAP gross margin, which signals to investors that they are a true-blue software company, it ends there. 

Their revenue in the latest quarter was $72.4 million, with a cost of revenue of $24.9 million. 

However, their operating expenses were a whopping $120 million. That’s 165% of their revenue, with an operating loss of around $70 million. 

That said, C3.ai is not in danger of going bankrupt anytime soon as they do have a cash balance of $812 million on their balance sheet. If they maintain this rate of incinerating cash, they have 11 more quarters to go.

Based on the management’s expectations, they will be able to turn the ship around and be cash positive and non-GAAP profitable by the end of fiscal year 2024. That’s one more year.

However, on top of burning cash for growth, shareholders are diluted at an alarming rate.

Source: YCharts

Since its IPO in December of 2020, AI has increased its shares outstanding from 96 million to 115 million (around +20%) in the short span of 2.5 years. 

Considering the current stage of growth C3.ai is in, and the aggressive stock-based compensation plan they award to employees for growth, we would expect to see this rate of dilution persist.

Source: C3.ai’s FY2023 Financial Results

We believe that the financials of C3.ai will continue to be challenged in the near future and not turn for the better, at least not until 2025.

Conclusion

We do understand that many investors are currently excited about the opportunity behind the seismic waves that Generative AI and Artificial Intelligence are creating in the investment world, but we still believe in investing prudently. 

Although C3.ai shows great potential in being able to penetrate across multiple industries with their AI tools, we believe that much is still left to be seen on whether they are able to accrue shareholders’ value in the long run — other than changing their company name. 

Valuations of many such growth companies tend to be wonky, because of the different expectations and assumptions investors are tagging to them. At the end of the day, when looking at companies such as C3.ai, it is hard to determine whether they are under or overvalued in their current growth stage. 

The baseline of the thesis should be on whether you believe in their story. 

We will adopt a wait-and-see approach around C3.ai stock. If they really have the potential to become a game-changer in the AI industry, it will show in the numbers. Allow them some time to continue executing and proving their worth to investors. Till then, we won’t be touching C3.ai’s stock anytime soon. 

However, there are many other AI-powered stocks in the markets today with immense potential. If you’re keen to know what AI stocks we’re currently looking at, do register for Piranha Profits’ upcoming live online event THE SIXTH WAVE , where our investment mentor Adam Khoo will show you how to profit from this AI Wave! 

Till then, Keep Winning.