What are the boundaries and applications of artificial intelligence? What limitations does it have in life and business? C3.ai (NYSE:AI) is an enterprise AI software company, and after analyzing AI stock, I’ve concluded that I like the company, but do not like the stock.
AI stock went public via an initial public offering (IPO) in December 2020. With an IPO price of $42, it surged almost 338% to a high of $183.90 based on FOMO trading, only to deflate like a balloon with holes all over it to an opening price of $51.01 on Sept. 10.
A 72% selloff off its highs is a reminder that IPOs are too risky for most investors. That being said, investors who bought it during the IPO procedure still have a decent gain of about 21% right now.
AI stock comes with risk and volatility, but is it a good time to buy it? To answer that, we need to look at its performance and price. Perhaps those are questions the company’s own software could answer with a forecast. But I don’t put much stock in forecasts. As for the price, we have cold, hard facts. I believe the key issue, though, is that C3.ai has an inefficient business model.
Future Growth for AI
Through 2025, the global AI market is expected to grow by $76 billion dollars at a compound annual growth rate (CAGR) of almost 21%. Another report pegs the CAGR at 40% from 2021 to 2028, and adds that “the continuous research and innovation directed by the tech giants are driving the adoption of advanced technologies in industry verticals, such as automotive, healthcare, retail, finance, and manufacturing.”
These two reports are optimistic about robust growth in the AI industry in the coming years. This seems like great news for C3.ai. But there’s a more immediate concern that faces the company.
C3.ai says it can offer AI software solutions and applications for a plethora of industries ranging from utilities to healthcare to retail and just about everything in between. Furthermore, the company claims that it can deploy its tools in three to six months, as opposed to years.
In theory, this sounds like great business efficiency. In practice, I would argue that it is a severely flawed business model. The company has delivered solid revenue growth, but at the same time is burning cash and losing money. That’s not an ideal business model.
AI Stock Earnings
C3.ai’s fiscal year ends on April 30, and from fiscal years 2019 to 2021 it has reported losses of $33 million, $69 million and $56 million. Free cash flow for 2020 and 2021 are both negative. At the end of the fiscal year, the company had $115 million in cash and equivalents and debt of $26 million. With a market capitalization of about $5.3 billion this debt issuance is minor, but it’s still a concern with negative cash flow.
Most recently, the company reported Q1 2022 earnings that were of mixed quality. The management was happy with the results, with CEO Thomas M. Siebel saying the company “began our fiscal year 2022 with strong results in the first quarter, including year-over-year increases of 29% in revenue and 31% in gross profit.”
It’s true that total revenue and subscription revenue were both up 29% year-over-year. But the bottom line is profitability. The goal of any business is to make a profit and increase profitability over time. C3.ai reported a net loss of $37 million compared to a net income of $150,000 for the same period a year prior. Keep in mind that that’s with an overall net loss for the year.
The company has reported guidance for the full fiscal year of $243 million to $247 in revenue. With a market capitalization of $5.3 billion, that’s a forward price-to-earnings ratio of nearly 22 times, which is too high.
Why Isn’t AI Stock Profitable?
The company also has some impressive numbers for its operations: “operating at massive scale, as of July 31, 2021, the C3 AI Suite and Applications were integrated with 849 unique enterprise and extraprise data sources, process 1.7 billion predictions per day, manage 24.4 trillion data elements, and evaluate 33.8 billion machine learning features daily.”
Despite those numbers, though, it seems the company still can’t make a profit. This is in spite of valuable partnerships with esteemed companies like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT).
AI stock is expensive, and the company has a lot of potential, but it’s losing money, and has a troubled business model that does not deliver results. Avoid it for now.
On the date of publication, Stavros Georgiadis, CFA 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.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.