C3.ai, an AI enterprise software platform, has seen a surge in stocks this year, growing 241% year-to-date. However, the ride hasn’t been smooth, with the company regularly being attacked by short-sellers and recently falling by 13% after its fourth-quarter earnings report failed to meet expectations. Despite this, Wedbush’s Dan Ives remains a supporter, upgrading the stock from neutral to outperform and raising his price target on the stock from $24 to $50. He acknowledged that the road ahead would not be easy, but said that the company had turned a corner and is set to take advantage of the $800 billion opportunity in AI over the next decade.
The stock has tripled this year, but C3.ai isn’t growing significantly. Its revenue was flat in the fiscal 2023 fourth quarter, and it declined in the third quarter. The company blamed this partly on the shift from a subscription model to a consumption model. It believes this consumption model is more aligned with the way customers use its products, but its guidance for fiscal 2024 does not inspire confidence in the company’s potential growth. The management guided for revenue of $295 million to $320 million. This implies a 15% growth at the midpoint, which is not enough to justify C3.ai’s high valuation, which is currently 16 times sales. The company remains deeply unprofitable, posting a GAAP operating loss of $290.4 million in fiscal 2023.
Although Ives is correct that there is a massive opportunity in artificial intelligence, C3.ai’s sluggish growth indicates that it’s struggling to capitalize on the opportunity. C3.ai makes most of its money from selling more than 40 AI applications to clients. This includes prepackaged AI-based software suites focused on demand forecasting, schedule optimization, and supply chain management, among other things. The company states that while it faces competition, it’s unaware of any end-to-end Enterprise AI development platforms that are directly competitive with the C3 AI Application Platform. However, this lack of direct competition could be due to the fact that competitors don’t see the market as profitable at the moment. Therefore, C3.ai must prove it can become profitable and expand consistently to justify its valuation. While the stock could hit $50 in the near term, the company’s valuation and lack of growth may cause the stock to face a decline in the long run.
