Many artificial intelligence (AI) companies rose to prominence in 2023, including C3.ai (NYSE: AI). With its ticker being "AI," it was one of the first names to appear when someone searched for "AI stocks." This likely helped drive the stock higher as it rose to more than $40 per share by last August.
However, C3.ai's shares have since pulled back significantly and now trade in the mid-$20s range. With that large pullback, some investors might wonder if this is the time to scoop up some shares. Should you?
Integrating generative AI into its offerings
C3.ai has gone through multiple iterations as a company. It started as a software company focused on oil and gas, then moved to become an Internet of Things (IoT) business. Then, it moved to integrate AI due to the direction of its IoT work. Now, it's pivoting to integrate generative AI into its products.
Clearly, the company has tried many different products and generated some business, but it has yet to find its niche. This raises some red flags as some of the best companies in the world have emerged from being excellent in one field and then expanded to others, not the other way around.
C3.ai provides various AI models that can be plugged into preexisting enterprise systems to provide maximum value. This includes tasks like supply chain management, energy efficiency, and smart lending. C3.ai also has various government contracts to develop AI models for specific use cases.
When I examine C3.ai, I see a company that is a "jack-of-all-trades" rather than one that specializes in a specific industry. These investments can work out, but only if the rest of the financial picture agrees.
A ways to go before turning a profit
C3.ai isn't a particularly large company. In its fiscal 2024 third quarter (ended Jan. 31), the company generated $78.4 million in revenue -- an 18% increase over a year ago. Management also provided guidance for Q4, with revenue expected to come in around $84 million, indicating 16% growth.
The company is generating demand for its products and growing, but it's also losing money at an unbelievable pace. In Q3, C3.ai posted an operating loss of $82.5 million. That means its cost of revenue and operating expenses were more than double its revenue. That's a huge red flag for me.
Furthermore, C3.ai's operating loss increased by 15% year over year, so it would take an incredibly long time for C3.ai to become profitable at its current pace. I'd be willing to let this slip if C3.ai was growing at a lightning-fast pace. But an 18% growth rate just doesn't cut it when plenty of fully profitable companies grow more quickly.
AI Operating Margin (Quarterly) data by YCharts
C3.ai also isn't a bargain deal either. At 10.6 times sales, it isn't cheap even though it's similarly priced to some of its software peers.
So, is C3.ai a top AI stock to buy now? Well, after reading this, you can probably conclude that it's not. Far too many companies are growing faster, closer to profitability (or already profitable), and dominating their niche to mess around with C3.ai.
You don't have to own every stock in the market, and cherry-picking the best is a great idea. As a result, I'd consider some other AI stocks before investing in C3.ai.
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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
