C3.ai (NYSE:AI) experienced significant growth due to AI hype, with its stock tripling during the ChatGPT AI wave. However, skepticism surrounds AI stock amid the stock’s high short interest. The company’s financials and outlook raise doubts about its potential for improvement, suggesting a further decline in its stock may be likely.
C3.ai positions itself as an enterprise AI provider, but its performance hasn’t matched the hype. Discrepancies between the company’s statements and financials became evident in its Q1 earnings, causing a significant stock drop and raising concerns for investors.
The Financials
C3.ai’s shares doubled this year amid AI excitement, but the company’s AI results lag. Quarterly revenue only grew 11%, and the annualized forward-looking forecast is 15%. C3.ai faces substantial losses and spends revenue on stock-based compensation. Additionally, the company’s goal of achieving adjusted operating profit was postponed.
C3.ai’s distinct focus on enterprise AI applications puts it in a unique position. However, potential competition from major cloud companies looms. The stock’s future appears uncertain, with a price-to-sales ratio of 10 times and limited growth relative to this valuation.
Extremely High Valuation and Weak Growth
C3.ai’s stock has held a price-to-sales ratio of over 10 for some time, which is increasingly excessive given its slow revenue growth, substantial losses, and significant share dilution. This valuation assumed the company would achieve substantial profits and AI software revenue growth, yet it lacked evidence of converting customer interest into revenue.
Despite its 14-year history, C3.ai’s financial performance didn’t align with its seemingly favorable position in the market. The lack of financial improvements and unwarranted hype from management suggested that the stock would likely continue to decline as the AI stock hype subsided.
Aside from management’s repeated enthusiasm about AI demand, C3.ai also struggled to translate interest into substantial revenue growth, as confirmed by its first-quarter results. Revenue only grew by 11% to $72.4 million, and the full-year revenue guidance of $295 million-$320 million indicated modest sequential growth and a 15% increase at the midpoint.
Sell C3.ai Stock Now Before You Sink With the Boat
C3.ai reported strong Q1 sales of $72.4 million, with an 85% share from subscriptions. The company inked 12 generative AI agreements and had 140+ potential opportunities. However, C3.ai’s financials reveal a negative free cash flow of $8.9 million, forcing management to delay profitability to April 2024 due to heavy generative AI investments.
Compared to competitors like Palantir Technologies (NYSE:PLTR), who achieved a 5.25% net profit margin in the second quarter, C3.ai’s immediate financial challenges and profitability issues warrant a cautious stance on its stock. While C3.ai offers long-term generative AI potential, the present turbulence underscores prudence.
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.