Software and technology company C3.AI (NYSE:AI) has seen its shares rocket upward in recent weeks, with the stock gaining 88 percent since the start of the year.
This leaves investors with two very important questions to answer. First, why has C3.AI jumped so drastically at a time when the overall stock market is struggling?
Second, and even more importantly, can C3.AI’s shares remain at these elevated levels or continue to climb following its recent dip?
As its name suggests, C3.AI is a software company focused heavily on artificial intelligence. The company’s platform is designed for enterprise-scale businesses attempting to integrate AI technology in digital transformation. According to the company itself, the C3.AI platform can be adapted to use in any industry.
Some of C3.AI’s prominent customers include Cargill, Shell, Koch Industries, Raytheon and Con Edison.
The company also has strategic partnerships with Google Cloud, Amazon AWS and Microsoft Azure. In addition to its private sector customers, C3.AI provides services to the United States Army and Air Force.
Why C3.AI Has Risen Recently?
The initial cause of C3.AI’s rally was the heavily publicized rollout of ChatGPT. This AI-powered chatbot rekindled enthusiasm for the AI industry among investors, sending several technology stocks on upward swings. As one of the few AI-focused companies already doing business with enterprise-scale businesses, C3.AI was a natural beneficiary of this trend.
C3.AI also saw its share prices rise following a modestly favorable Q3 earnings report in early March. The company slightly beat out its own revenue guidance for the quarter, reporting $66.7 million against expectations of $65 million.
It should be noted, however, that C3.AI only expects revenue for the full year to grow by 4-5 percent. This slow rate of revenue growth is one of the company’s major drawbacks, as C3.AI will likely need considerably higher sales to eventually achieve profitability.
A final reason for C3.AI’s rapid rise is the fact that the AI market could see meteoric growth over the coming years. C3.AI’s own CEO has projected a $600 billion addressable market for AI software within a few years.
While excessive enthusiasm may be at play in the industry today, it’s clear that AI will create real value for businesses as the technology improves and becomes more widespread. As such, companies like C3.AI may be an attractive new opportunity for growth investors struggling to find rapidly growing companies among the more traditional FAANG stocks.
Is C3.AI’s Higher Stock Price Sustainable?
While C3.AI has gained a great deal of ground since the beginning of the year, shareholders may not see these gains last for long.
The most prominent indication that C3.AI’s surge may not last is its continuing lack of profitability. In FY2022, the company reported losses of $2.42 per share and a net margin of -98 percent.
Although C3.AI has the advantage of working with large, well-established businesses, it will need to significantly improve its earnings to justify its current valuation.
Another potential problem for C3.AI is its concentrated customer base. The company has only 236 customers, and a single one of its clients, Baker Hughes, accounts for 30 percent of all revenue.
This introduces serious questions about how widely applicable C3.AI’s platform really is and whether more customers will be eager to sign up for the company’s services. This concentration could also make C3.AI particularly vulnerable to reduced spending by a small group of customers.
Final confirmation of this more bearish view may be found in the fact that C3.AI has already fallen considerably off of its recent highs. C3.AI peaked at $28.48 on March 3rd. At the time of this writing, the stock had fallen closer to $20 per share shedding roughly a quarter of its value in the process.
While volatility related to the collapse of Silicon Valley Bank likely affected C3.AI, it also appears that investors are reassessing C3.AI on its own merits. This could open the door to further declines, though the stock will likely remain well above its 2023 opening price for some time.
AI Bullish Investment Thesis
With all of this said, there are still some positives around C3.AI. First and foremost is the company’s lack of debt. This, combined with a cash reserve in excess of $789 million, could offer C3.AI some protection from current and near-term market turmoil.
Even with a full-year loss of over $192 million in 2022, C3.AI could continue to lose money at its present rate for multiple years before its reserves run out.
There’s also a strong argument to be made that C3.AI’s recent anemic growth has been largely due to macroeconomic conditions. With companies less willing to invest in new technologies, software platform providers like C3.AI naturally experience slower growth. If macroeconomic conditions improve, however, the company could see its revenues begin to rise again.
A final positive for C3.AI is the fact that the stock is still trading at a massive discount to its IPO price. The company went public in 2020 at a stated price of $42 per share. Due to its popularity, the stock rapidly climbed to well over $100 as investors snapped up the initial offering. While many bears argued at the time that the stock was likely overpriced, the nearly 50 percent discount at which C3.AI trades today could make it more attractive than when it went public.
Ultimately, C3.AI could be a stock to watch as companies compete to bring AI software solutions to market. As an established player in this space with links to several large enterprises, C3.AI may be in a unique position to benefit from improvements in AI in the coming years.
While the stock appears to be substantially overvalued at the moment, the company could be a success in the long term if it can begin growing its revenues again and move toward profitability.
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