Ignore This Under-the-Radar AI Stock At Your Peril

C3.AI was among the first stocks to bring the idea of artificial intelligence to the forefront of investors’ minds. But it was weighed down by short sellers pointing their arrows at it with claims that have since been contested and refuted.

Today, the company is looking to put those gloomy days in the rearview mirror and anticipates faster growth thanks to its pivoted revenue model, from traditional SaaS to consumption.

That simple yet tectonic shift is the reason why historical sales growth of 27.1% over the past 5 years is set to give way to forecasts of 33.1% annualized growth over the next 5 years, but will they come true?

Key Points

• C3.AI’s switch to a consumption-based model has boosted sales growth.
• High stock-based compensation has diluted shareholders.
• Strong cash reserves and minimal debt are positives.

Revenues Starting to Tick Higher

Already the proof is in the pudding that management’s revenue model shift is starting to pay dividends. For the four quarters preceding Q2 2023, sales failed to grow year-over-year at faster than 10.8% with a quarterly slide of 4.4% in Q1 2023 marking the low.

But the last 3 quarters have told a different story altogether. No quarter has been reported with sales growth under 17% and the pace accelerated to 19% in the most recent quarter.

Given the lack of profitability, we don’t have the ability to make a confident 5-year net income forecast but that’s perhaps less a concern to investors than the company’s extremely generous stock-based compensation package that ranks among the highest on the Street, multiples above the median firm.

The problem with high SBC is it dilutes existing shareholders. How frustrating is it to see a company make progress only to discover that all the gains are accruing to insiders with nothing left for remaining stakeholders.

Another concern is that it’s hard to get real visibility into what’s going on. Sure there’s a lot of talk about artificial intelligence and how it will be applied in the financial reports, but we don’t quite get a handle on what’s tangible versus fluff. Nor do we get to learn much about the breakdown of revenues among customers, which informs of key concentration risks.

Nevertheless, the top line is the oxygen of the firm and it’s definitely on the right track, so is it time to buy in spite of the uncertainty and stock dilution?

Is It Time To Buy C3.AI?

There are reasons to be optimistic about the future of C3.AI and it seems sentiment is shifting in the firm’s favor with six analysts upgrading their earnings estimates for the upcoming quarter.

It’s also nice to see an AI company with a healthy balance sheet that is rich with $167 million in cash and $583 million in short-term investments. That contrasts nicely with the lack of debt and suggests the $3.4 billion market capitalization is not excessive, particularly given the $310 million in annual sales.

Nonetheless, analysts consensus price target is $28.94 per share, which is close enough to where the share price currently resides that we would rather sit on the sidelines for now and wait for a correction before the reward to risk signals an attractive buy.

For what it’s worth, a discounted cash flow analysis suggests fair value sits closer to $23 per share, suggesting risk is relatively high now and the upside is muted absent some positive catalyst.

The bottom line is this is an attractive company but one which has largely had the good news priced in already.