Will C3.AI Stock Bounce Back?

C3.ai, Inc. (NYSE:AI) share price took off following growing buzz around AI solutions that could be applied to various market verticals. The company, which is a leading provider of AI enterprise applications, was able to seize the opportunity when hype around the potential for artificial intelligence really took hold.

The software company founded by Tom Siebel focuses on developing AI solutions for enterprises, mainly in energy, manufacturing, healthcare, and telecommunications.

Tom saw the potential for AI long before most others and grew C3.ai to be an attractive partner to companies who were eager to enter the AI space and reap its benefits when excitement hit a fever pitch.

In spite of those tailwinds, the stock fell by 13% over the past twelve months, pushing the company’s market capitalization lower to $3.6 billion, so is time for a recovery?

Will C3.ai Survive Growing Competition?

C3.ai is facing intense competition, affecting both its market valuation and the confidence of investors.

Well-established competitors in enterprise AI are threatening its margins, and financial woes have led to growing concerns about the prospects of C3.ai maintaining its marketplace edge. Indeed, the company’s applications run the very real risk of being imitated or even displaced by rivals.

Certainly, its strategic partnerships with technology giants are advantageous, but C3.ai’s uniqueness and competitive advantage in an increasingly saturated market space are in jeopardy.

The sustainability of the firm has also been called into question thanks to a steady stream of growing losses and declining margins that may demand fundamental changes to how the company operates.

With all that said, C3.ai offers a suite of fully integrated products, including the C3 AI Application Platform, an end-to-end platform for developing, implementing, and operating enterprise AI applications, as well as C3 AI Applications, a collection of industry-specific SaaS enterprise AI applications.

The suite of offerings so far has not been resilient enough to turn the company profitable as competition, most notably from Palantir Technologies Inc. (NYSE: PLTR), has grown.

While both companies drew investors’ interest last year, during the hectic period of the AI revolution, C3.ai failed to deliver financially whereas Palantir managed to report steady financial improvements and innovations.

C3.ai Is Yet to Be Profitable

Although C3.AI has yet to make a profit, its balance sheet is almost entirely free of debt, suggesting that concerns over its fragility are somewhat exaggerated.

A list of high-profile clients and government contracts also provides comfort that stable revenue are likely to persist. However, C3.ai is under pressure to turn its bottom line black.

At a time when revenues are growing it is concerning that gross margins are down and net losses are up. C3.ai has generated net losses in each period since its beginning in 2009.

It reported net losses of approximately $268.8 million and $192.1 million for the fiscal years that ended April 30, 2023, and 2022, respectively.

The company’s accumulated deficit of $810.2 million at the end of April 2023 reflects poorly on its ability to both operate successfully and reward shareholders.

Top Line Growth, Bottom Line Concerns

The odds point to it remaining in the red in the foreseeable future. These losses and the build-up of the deficits stem from the heavy investments in customer acquisition, commercialization of C3 AI software, and continued development of C3 AI software.

Total revenue for last quarter was $78.4 million, an increase of 18% compared to $66.7 million one year ago.

Net loss on a non-GAAP basis came in at $15.88 million, compared to $6.16 million in the year-ago period and gross margin for the period was 58%, which marked a significant decline from 67% year-over-year.

Management has reported a rise in revenue in recent periods, but its capacity to do the same in the future is somewhat doubtful. The burning question that looms is whether it can generate sufficient revenue to turn the bottom line profitable.

To add to the concerns, management believes that costs and expenses are likely to rise in future periods, which may very well adversely impact the all-important bottom line.

To sustain top line growth, the plan is to grow enterprise sales and the service organization across geographies and vertical markets to boost consumption of C3.AI solutions among existing customers and to form new customer relationships.

The company is projected to have several new functions and products released in the coming years, which should generate revenue both among new and existing customers. To-date, clientele have primarily been comprised of large enterprises that stand out as premier players in their industry or governments.

Will C3.ai Stock Bounce Back?

C3.ai is unlikely to bounce back soon given that analysts have a $28.94 price target on it which suggests 3% downside risk.

It also seems to be overpriced on a multiples basis with the forward price-to-sales ratio of 9.51x, which is higher than industry peers. 

The firm’s growing revenues offer promise, but it has not yet reached profitability and the lack of a clear point in time when it will is perhaps the greater concern.

With the enterprise AI industry growing increasingly competitive, C3.ai is likely to struggle to gain a stronger foothold in market share.

The bottom line is the threat of rivals coupled with falling gross margins suggests heightened pressure on profits, at least in the short-term.

While C3.ai seems to have long-term growth potential, investors may well be better off sitting and waiting for the opportunity of a better entry point. 

The consensus rating for the stock is a ‘Hold’ with 6 analysts out of 11 recommend to hang tight for the moment.

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