Up 130%: Is There Still Time to Buy This Scorching AI Stock?

Up 130%: Is There Still Time to Buy This Scorching AI Stock?

Investors are on a seemingly endless chase, looking for the next big thing. Artificial intelligence (AI) appears to be Wall Street’s hottest topic in 2023. As tech’s most prominent companies embrace AI, investors are scrambling for exposure and buying up various artificial intelligence stocks.

Count AI software company C3.ai (AI 2.22%) among them; shares are up about 130% in the past month alone. But knowing the difference between emotionally driven price action and price action driven by solid fundamentals is an important distinction. Below I will show you which category C3.ai falls into.

Narrow down what C3.ai does

Artificial intelligence is a pretty ambiguous term for such a hot topic as it has become; different AI companies do different things. It seems that the most common use for AI today is to better digest data and analyze it to improve decision-making in organizations. C3.ai offers a range of AI-powered software applications for enterprises and governments.

For example, businesses can use several of C3.ai’s supply chain suite of applications to optimize inventory, procurement or scheduling. Applications in the public sector suite can increase building valuation accuracy or maximize tax revenue. The defense and intelligence suite has applications to analyze intelligence data and provide AI insights to aid decision-making.

C3.ai has a three-phase sales cycle that ends with a lead-in period once the software is successfully implemented and running. Data is probably everywhere and in almost all industries; thus there is a huge market opportunity for AI. C3.ai’s management estimates that its total addressable market will be worth $596 billion by 2025.

Do the fundamentals justify the share price?

It’s a great story, but it won’t translate to long-term investment returns without strong operating performance. C3.ai has some important concerns at the moment; you can see in the chart below that revenue growth has slowed dramatically over the past year while cash losses have accelerated. C3.ai generated $270 million in revenue over the past four quarters, so burning through $202 million isn’t great — especially considering the company issued $180 million more in stock-based compensation.

AI Revenue (Quarterly YoY Growth) data by YCharts

A few quarters ago, management announced an overhaul of its sales force and a transition to usage-based billing. It believes the new billing model will help growth in the long term, but will hurt short-term revenue growth. In other words, new customer deals may not add much to the company until it later reaches that ramp phase. C3.ai is also aiming for profitability, with a goal of positive cash flow by the end of fiscal year 2024, six quarters from now.

What should investors do?

Better growth and becoming profitable are noble goals, but management needs to show results to back them up over the next 18 months. Whether by design or not, C3.ai’s current fundamentals look weak, and it’s hard to imagine that the recent run on the stock is justified. Instead, a stock with the literal ticker symbol AI seems to have gotten hot because of the hype that artificial intelligence has over the entire market.

That’s not to say C3.ai won’t succeed, but there’s more to lose by chasing the stock now than simply waiting for revenue growth and cash losses to improve before jumping in with both feet. If the potential market opportunity is hundreds of billions of dollars, growth shouldn’t be that difficult since the company’s revenue was only $270 million over the past year.

Investors looking to own the stock now should use a dollar-cost averaging strategy to slowly build a position. Otherwise, it may be smarter to wait a few quarters for better operating results.

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