Artificial intelligence is having a bit of a moment in 2023. ChatGPT, an AI chatbot developed by the Silicon Valley firm OpenAI, became the fastest-growing app in history as it topped 100 million users worldwide in just two short months. And in the kerfuffle since then, a host of stocks from chipmaker Nvidia Corp. (ticker: NVDA) to Big Tech icon Alphabet Inc. (GOOG, GOOGL) have been riding the wave.
A smaller and lower-profile play some investors have been watching, however, is C3.ai Inc. (AI). This midsize company is valued at roughly $5 billion at present, and has been flying under the radar of many investors.
So is C3.ai stock a buy right now to ride this emerging megatrend from the ground up? Or is it too risky a proposition at the moment?
Raw HTML : C3.ai Security Chart
Pro: A Dedicated AI Business
As you may have guessed from its quirky name and on-the-nose ticker, C3.ai stock is defined by its artificial intelligence business, standing in contrast to megacap tech stocks that simply dabble in artificial intelligence or machine learning applications.
Its business includes an AI application platform and related developer tools, enterprise-level data analysis platforms to help teams refine their technologies, and even an inventory optimization toolset to help companies in the real economy translate AI into practices that optimize raw material, finished goods inventory levels, and supply chain operations.
Con: It Generates Only Modest Sales
Market valuation is one thing, but C3.ai is expected to only do about $300 million in revenue in its current fiscal year. Compare that with Dish Network Corp. (DISH) or Newell Brands Inc. (NWL), two of the smallest components in the S&P 500. Both have lower market values than C3.ai at under $4 billion each right now, but they have about $15 billion and $9 billion in annual sales, respectively.
In Wall Street math, AI stock is trading for more than 18 times sales. And while it may not be apples-to-apples to measure against the telecom Dish or the consumer products company Newell, many other tech stocks trade for much lower ratios. Case in point: big tech stock GOOGL trades for less than six times sales as of this writing.
Sales aren’t even growing by a jaw-dropping margin, either. A 16% growth rate this fiscal year and a projected 20% growth rate next fiscal year is certainly decent, but may give some investors pause given the premium valuation.
Pro: The Addressable Market Is Huge
Of course, modest revenue and market share right now doesn’t mean anything for the future. Particularly because the addressable market for artificial intelligence software products like the ones sold by C3.ai is predicted to hit $37 billion by 2025, according to a recent report from researchers at Forrester.
What C3.ai has going for it is “turnkey” enterprise AI applications that are ready for a host of industries – from oil and gas to manufacturing to financial services to aerospace and defense to health care to communications. If anyone is ready to scale up and scale up quickly to meet these needs, it’s a company like this one.
Con: C3 Is Burning Cash
C3 stock is fundamentally a bet on the future promise of AI, because the reality is that the company is deeply unprofitable at present as it scales up to meet this challenge. For instance, its net loss in its fiscal 2023 which ended in May was $2.45 per share. Even on a more liberal, adjusted basis, the company still lost 45 cents per share last fiscal year.
One could say it’s normal for an artificial intelligence stock to invest heavily in future growth rather than focus on maximizing current profits. But the company only has about $700 million in cash and investments on the books, so it doesn’t exactly have a huge cushion to fall back on. That means sooner rather than later, C3.ai is going to have to figure out how to actually make money and build a financially sound operation that lasts.
Pro: Red Hot Momentum
While the risks may be real, the thing that may spackle over any of these holes is the amazing performance of C3.ai stock. Shares are up about 150% in the last 12 months as of this writing, blowing away the rest of Wall Street. There’s also analyst support for this stock, too, with Wedbush upgrading shares to outperform in June even after this impressive run.
There’s an old adage that investors should look to buy low and sell high. But increasingly, with momentum stocks like C3.ai, it can be profitable to buy high and simply sell much higher.
Con: The Competition Is Red Hot, Too
By all accounts, C3.ai has a legitimate suite of artificial intelligence solutions and strong investor support right now. But that can be said for other companies, too. And while you can never be 100% sure about what will work and what won’t in the years ahead, it’s worth noting that some competitors like Google parent Alphabet and Microsoft Corp. (MSFT) have significantly deeper pockets – and an equally strong desire to succeed.
Even if you like what you see in C3.ai stock right now, it’s worth acknowledging that sometimes today’s leaders can be knocked off their pedestal. So if the pros look like they outweigh the cons to you, just tread lightly. And make sure to keep an eye on the competition.
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