Stock of the week - C3.ai (16.02.2023)

C3.ai stock jumped more than 120% since the beginning of the year and many investors wonder whether we are dealing with an investment bubble or is it still a buying opportunity?

Artificial intelligence (AI) appears to be the new investment trend on Wall Street, and one company stands out from the rest of the industry, namely C3.ai. The company provides AI solutions for businesses, which helps its customers integrate ready-made AI solutions into their systems, which improves efficiency and generates savings.

The stock debuted during the IPO peak in late 2020 at around $100 a share and within a few weeks price broke above $150 mark. However, the stock experienced sharp-sell-off in February 2021 and is currently valued at just over $25 per share. The question is whether the company's best days have already passed by, or are we dealing with its second life right now?

C3.ai has one of the best offers in the industry

Introduction of ChatGPT sparked market attention regarding AI companies. ChatGpt is an AI-powered chatbot developed by OpenAI. The hype generated by this technology led investors to seek investment opportunities in the AI sector, which is why C3.ai has been in the spotlight.

Why is this particular company on the investors' radar? C3.ai has one of the best offers compared to its competitors and was named an industry leader by Forrester Research. Its analysts claim that C3.ai has the most robust strategy from all of the analyzed companies. Interestingly, it beat Palantir, Alphabet (Google Cloud), Microsoft and Amazon. This is an amazing achievement and shows the prowess of C3.ai.

It is worth taking a closer look at the production application. C3.ai's pre-built and customizable AI tools can help analyze supply chain risk while optimizing inventory levels. ChatGPT can also be used in production processes to optimize the production schedule and reduce energy consumption, which can generate huge savings. The software can also be used in financial services, the military sector and healthcare.

C3.ai's products can be widely used, but is the company's stock too expensive taking into account its current financial situation?

A slow-growing and highly unprofitable business

In the second quarter of fiscal year 2023 (ending October 31, 2022), C3.ai revenue increased by just 7% to $62.4 million. This indicates that C3.ai is not a very big company. Secondly, sales are growing slowly despite the company's excellent products. Why is this happening?

One of the main reason is prevailing economic uncertainty, as many potential customers are unwilling to sign huge deals that could strain their financial resources. After publication of Q2 results, Chief Financial Officer Juho Parkkinen addressed concerns regarding 66 deals that had been pushed back from Q1 to Q2. Not all of them have been finalized, however Parkknem pointed out that the situation is stabilizing.

In addition, C3.ai changed its business model in Q2 from a subscription to a consumption-based model that aligns customer usage with C3.ai's bottom line. Basically, the more of its products are used, the more the company earns. Investors will see the full impact of this model when C3.ai reports its Q3 results on March 2, but the change in business model can be expected to have a positive long-term effect.

As one might expect, C3.ai is not profitable as it is in early stages of expansion.

C3.ai's operating loss reached $72 million. This means that C3.ai has a long way to go before profits occur. A large part of the loss was $56 million stock-based compensation bill -, which eated up nearly 90% of  revenue. It's not unusual for such young companies, but investors will need to watch for improvements throughout 2023.

Conclusions

Before the recent rally, C3.ai valuation was extremely low, with a P/S of close to 4. This was a ridiculously low valuation for a tech company like C3.ai, but after a recent upward move, its valuation is comparable to its competitor Palantir. With nearly 10 times sales, C3.ai is currently trading at fair value or slightly overvalued taking into account slow growth. However, as is often the case of highly popular stocks, the fundamental factors are overshadowed by optimistic sentiment and bullish hopes.