AI Stock Alert: Is C3.ai’s Drop a Dive into Opportunity?

Stock Market

C3.ai (NYSE:AI) stock had a turbulent year, surging initially but dropping recently due to concerns about its performance and profitability.

Shares are down 44% since August, due to somewhat disappointing Q1 results and no profit outlook for the new fiscal year. This has raised concerns about the company’s relatively high valuation.

Here’s what you need to know about C3.ai, and whether it’s a buy now.

C3.ai on Generative AI

Despite market concerns about profitability, C3.ai recently reaffirmed its commitment to AI product development, a move that I consider bullish for AI stock. The company, headquartered in California, specializes in AI-empowered software, distinguishing itself from Microsoft (NASDAQ:MSFT), which invested in OpenAI’s ChatGPT generative AI chatbot technology.

C3’s generative AI models, launched in March 2023, are already adopted by major firms, like Georgia-Pacific and Nucor (NYSE:NUC) They’re cloud-platform versatile, process various data types, and support diverse AI models, offering comprehensive solutions.  For those bullish on this space, C3.ai is clearly a stock to watch closely. 

The Bearish Perspective on AI stock

The thing about C3.ai is that its rate of growth is quite slow, relative to its valuation. C3.ai’s stock soared 120% in 2023, primarily due to AI hype, not performance. Its fiscal Q1 revenue grew by only 11% year-over-year, which is modest for a stock with a high 10-times sales valuation.

C3.ai’s full-year guidance isn’t justifying its valuation. Fiscal 2024 revenue is expected at $295-320 million, a 15% increase over fiscal 2023. Wall Street analysts note C3.ai isn’t capitalizing on AI growth, and this could continue to drag on the stock due to its high sales multiple.

Despite these concerns, potential long-term opportunities could make it appealing at a lower valuation.

Don’t Lose Hope on C3.ai

C3.ai’s recent growth struggles stem from a business model shift, transitioning from subscriptions to consumption-based charges. Although this change enables faster deal closures, it will take around three more quarters to fully scale and boost growth. Fiscal 2024 revenue guidance aligns with this timeline.

After a modest 5% revenue increase in fiscal 2023, C3.ai expects much stronger growth in the current year, citing an improved sales pipeline post-transition. CEO Tom Siebel mentioned 12 generative AI deals and a pipeline of over 140 qualified C3 Generative AI enterprise prospects.

The company is also experiencing growth in government-related business, with federal bookings up 39% year-over-year last quarter. Analysts foresee an acceleration in C3.ai’s growth over the next couple of fiscal years.

What Now

C3.ai might regain momentum as its growth accelerates. The company targets an addressable market projected at $791 billion by 2026. Thus, for long-term investors eyeing an AI stock, C3.ai appears to be a viable choice, depending on the time horizon. Short-term volatility may be viewed as a means of getting in at reasonable prices, and building a position.

However, for those without the stomach for volatility, 0r with a shorter-term investing time frame, this probably isn’t the stock for you.

There are other more direct AI plays in the market that have turned this secular growth catalyst into profitability almost instantaneously. Focusing on such names may be a better fit, even over a multi-year time frame.

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.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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