C3.ai is trading 40% below its IPO price: 4 reasons it could fall further

C3.ai‘S (AI -0.08%) The stock closed at an all-time high of $177.47 on December 22, 2020. This represents a 333% gain from the IPO price of $42 just two weeks ago. In those halcyon days, investors were attracted to catchy tickers and fast growth rates, and frenzied buying of hypergrowth and meme stocks amplified those gains.

But as of this writing, shares of the artificial intelligence (AI) software maker are down 40% from their IPO price of about $25. The strength retreated as sales growth cooled, steep losses were incurred and rising interest rates pushed up frothy valuations. Unfortunately, we think the stock could fall further this year due to four key issues.

Image source: Getty Images.

1. Joint venture with Baker Hughes expires

C3 generates about 30% of its revenue through joint ventures with energy giants. baker hughes (BKR 1.77%). This core transaction is scheduled to expire in fiscal year 2025, which ends in April 2025, and there is no assurance that it will be renewed.

Instead, Baker Hughes actually renegotiated its commitment to lower annual earnings in 2021, sold its own stake in C3.ai, and invested in C3.ai’s competitor, Augury. These bright red flags strongly suggest that Baker Hughes will either abandon the joint venture if the contract is renewed or significantly reduce its annual revenue commitments again.

2. The moat is drying up

C3 develops AI algorithms that can connect to a company’s existing software to accelerate and automate specific tasks. They claim that these services can improve employee safety, detect fraud, and streamline corporate spending.

Although this sounds like an innovative approach, many companies offer similar services. Ui Pass (road 0.21%) Automate tasks with software robots, sales (CRM -1.26%) Accelerate cloud-based services with our own Einstein AI platform. Amazon (AMZN 0.80%) web services and microsoft (MSFT 0.60%) Azure integrates its AI services into its cloud platform. C3 may find it difficult to stand out in an increasingly crowded market. This is especially true when larger competitors combine AI tools with other cloud-based services.

3. Sacrificing margins to jump on another bandwagon.

Before C3.ai was rebranded as an ‘AI’ company, it was known as C3 Energy and C3 IoT (Internet of Things). C3 called itself an energy company when the energy sector was hot, an IoT company when everyone was trying to sell IoT devices, and suddenly morphed into an AI company to take advantage of the AI ​​boom.

But underneath it all, C3 still sells many of the same machine learning algorithms it previously developed for the energy and IoT markets as “AI” tools. It was also eager to join the generative AI trend with the recent launch of the C3 Generative AI Suite, which offers dozens of generative AI tools to a wide range of industries.

While this may seem like the right move in an evolving market, the company plans to increase its R&D and marketing spending to promote these tools. Last September, it abandoned its original goal of becoming profitable on a non-GAAP basis (generally accepted accounting principles) by the end of fiscal 2024, which ends in April of this year, in order to aggressively expand its generative AI ecosystem. This is a desperate move, a willingness to sacrifice margins to jump on the next bandwagon.

4. The stock price is not cheap yet.

C3’s sales grew only 6% in fiscal 2023, compared to 38% growth in fiscal 2022 and an initial forecast of 22-25% growth. It blamed the slowdown on macro headwinds that forced many companies to curb software spending. But this slowdown was made worse by the chaotic transition from subscription plans to usage-based fees throughout the year. This, we argue, is necessary to win over more cost-conscious customers in a more challenging macro environment.

C3 claims it can grow revenue by 11% to 20% in fiscal 2024, but since the company largely missed its own guidance for fiscal 2023, we should be skeptical of that forecast. Currently, analysts expect sales to increase by 15% for the full year. .

But C3, valued at $2.2 billion, is still trading at seven times this year’s revenue. By comparison, Salesforce and UiPath both have about eight times this year’s revenue, but face fewer near-term challenges than C3. So at these levels, the C3 cannot yet be considered very affordable.

Stick with the better AI stocks on the market

C3.ai still gets a lot of attention as a ticker symbol, but there are better AI stocks to buy right now. C3 is not out of business yet, but its investments are sluggish due to customer focus issues, unpredictable growth, and steep losses.