Can C3.ai shares be purchased now? | The motley fool

As companies look to integrate various types of artificial intelligence (AI) into their systems, companies that offer plug-and-play solutions will benefit because they can be implemented quickly. C3.ai (TO THE 3.95%) has multiple drop-in offers that help its customers solve problems in fairly common areas.

However, thanks to the recent hype surrounding AI stock, C3.ai’s stock has skyrocketed, leaving many potential shareholders behind. But have the shares gone too far? Or is it time to establish a position? Let’s find out.

C3.ai offers AI solutions for different industries

C3.ai has products for various challenges many customers will face. For example, it has an energy management product to reduce operating costs, a supply network risk solution to identify bottlenecks, and inventory optimization to streamline a manufacturing operation.

These products have been used in different industries, but C3.ai’s main customers come from two industries: oil and gas and defense. In fiscal 2023 (ended April 30), oil and gas made up 34% of C3.ai’s bookings, and federal aerospace and defense made up 29%. With over three-fifths of its business coming from these two industries, C3.ai has clearly found its niche.

In addition, C3.ai also has a large language model (LLM) product. Generative AI is the same technology that powers many of the chatbots on the internet and can be used in conjunction with any of C3.ai’s other products. Even though this product was only released in the fourth quarter, C3.ai saw increased demand and closed three Generative AI contracts shortly after launch.

However, C3.ai has problems and its financial statements reveal many challenges facing the company.

Stock-based compensation is a problem for C3.ai

At face value, C3.ai’s revenue results don’t look good for the fourth quarter. Revenue was up just 0.1%, indicating there may not be much growth for C3.ai. However, that figure is misleading because the company is in the midst of a billing shift from subscription to consumer. After the company completes the first quarter results, C3.ai will finally have a full year with the consumption billing method, and it will become an apples-to-apples comparison starting in the second quarter.

This is reflected in the company’s outlook for the year 2024, as it expects revenue to grow 15%. However, that’s not very fast growth relative to its expenses.

C3.ai is nowhere near profitable. In the fourth quarter, C3.ai lost $73.3 million in operations, earning just $72.4 million, indicating it spent more than double what it brought in. For fiscal 2023, that’s even worse, as C3.ai lost $290 million from operations while generating $267 million in sales. For the quarter and fiscal year, operating losses increased by 30% and 49%, respectively, suggesting that C3.ai doesn’t appear to prioritize efficiency.

AI operating margin chart (TTM).

YCharts AI Operating Margin (TTM) data.

Management did not provide operational guidance on generally accepted accounting principles (GAAP), but did offer a non-GAAP version. For fiscal 2023, C3.ai expects to post a non-GAAP operating loss of $62.5 million. This is nearly in line with its fiscal 2023 operating loss of $68 million, which may indicate that C3.ai is becoming more efficient. But don’t be fooled; non-GAAP losses subtract stock-based compensation, a massive portion of C3.ai’s expenses.

In fiscal 2023, C3.ai distributed a staggering $217 million in stock-based compensation. Compared to $113 million in fiscal 2022, that marks nearly double the compensation. Also, because this figure is subtracted from its non-GAAP guidance, C3.ai may plan to double its stock-based compensation bill again in fiscal 2024, but investors wouldn’t see the increase if they just looked at the fiscal year. 2024 non-GAAP guidance.

In light of these issues, C3.ai does not currently appear to be an attractive investment. I need the company to show me that it can grow faster than its expenses; otherwise, it may never achieve profitability. Additionally, the stock trades at a premium of 17 times its sales. There are far better investments out there at lower prices, so C3.ai is a stock I’m not interested in buying right now.

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