Numerous stocks in the artificial intelligence (AI) sector have experienced an exceptional surge in 2023, buoyed by increasing AI adoption and positive prospects for future applications. Technology giants like Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOGL) have seen impressive year-to-date gains of 41% and 48.8%, respectively. Meanwhile, Nvidia (NASDAQ:NVDA) has stood out with an astonishing 226% rally, becoming the seventh U.S. company to surpass a $1 trillion market cap. However, overshadowing these tech titans is a relatively smaller AI stock that has outperformed them all. C3.Ai (NYSE:AI) has surged a remarkable 255.3% in 2023, driven by growing interest and widespread implementation of AI-driven solutions in businesses.
Despite its stellar performance, C3.Ai’s stock (NYSE:AI) has experienced a recent decline of 22% since reaching its 52-week high of $48.87 in mid-June. The question now is whether C3.ai can reclaim its previous highs and sustain its momentum. To answer this, we need to delve into the reasons behind C3.ai’s exceptional rally so far in 2023 and assess its current valuation compared to its AI competitors.
C3.Ai Overview
Before analyzing the reasons behind C3.Ai’s rally, it’s essential to understand the company’s background and its role in the thriving AI industry. C3.Ai was founded in 2009 by tech billionaire Thomas Siebel, who previously sold his company, Siebel Systems, to Oracle in 2006. Based in California, C3.Ai provides a range of AI solutions for enterprises, including an AI application platform, industry-specific AI SaaS solutions, and a generative AI platform tailored to the needs of businesses. With a market cap of $4.6 billion, C3.Ai falls comfortably within the mid-cap category.
Factors Behind C3.Ai’s 2023 Rally
The primary driver of C3.Ai’s remarkable stock performance has been the rising adoption and application of AI-driven solutions in various enterprises. This aligns perfectly with C3.Ai’s core focus, offering software-based AI solutions to enhance productivity and profitability for businesses. The AI industry’s overall prospects look promising, with forecasts indicating significant growth potential. Over 84% of executives are looking to leverage AI technology, and the market is expected to reach over $190 billion by 2025, contributing $15.7 trillion to the global gross domestic product (GDP) by 2030.
Additionally, a strategic move made by C3.Ai at the end of 2022 has contributed to its rise. The company shifted its pricing model from subscription-based to consumption-based, following industry standards. As the adoption and usage of AI solutions expand, this move could prove to be beneficial for C3.ai’s growth.
C3.Ai’s Fundamentals
Despite the optimism surrounding AI and its positive impact on C3.Ai’s stock, the company’s core fundamentals have raised some concerns in recent quarters. In its fiscal fourth-quarter results, C3.Ai reported nearly flat total revenues of $72.4 million compared to the previous year’s $72.3 million. Furthermore, the company’s losses widened from $0.55 per share to $0.58 per share in Q4.
While C3.ai’s revenues from its core subscription business have increased by about 23% over the last two years, the company’s losses nearly doubled during the same period. This is in contrast to the broader AI market, which has more than doubled in size over a similar timeframe.
However, some positive signs are evident in C3.Ai’s results. The company generated a positive free cash flow of $16.3 million in the fourth quarter, compared to an outflow of $14.7 million in the previous year. Additionally, its loss per share has consistently been narrower than the consensus estimate over the past five quarters. C3.ai’s balance sheet is debt-free, providing flexibility for future investments and growth.
Valuation and Analyst Estimates
C3.Ai’s valuation is a mixed bag compared to its AI software peers. Its price-to-sales (p/s) ratio of 16.56 appears steep in contrast to Alteryx (AYX) at 3.15 and IBM (NYSE:IBM) at 2.15. However, the price-to-book (p/b) ratio of 4.61 is more favorable, lower than IBM’s 5.85, and significantly cooler than AYX’s 21.50.
Analysts hold an optimistic outlook on C3.Ai’s earnings, with predictions of 9.52% growth for the next quarter and an overall improvement of 12.65% for FY24. However, most analysts currently rate the stock as Hold, with a mean target price of $27.18, indicating a downside potential of about 31.6% from its current levels.
Conclusion
C3.Ai’s stock rally primarily represents a bet on the future, given the positive projections for the AI industry and its applications in enterprises. The company’s leading position in the AI-enabled enterprise solutions space positions it well to benefit from broader AI adoption. Moreover, its valuations remain reasonable compared to peers, even after the substantial rally.
However, challenges lie ahead, as the company’s profitability and revenue growth have not kept pace with its stock surge. Investors should closely monitor C3.Ai’s efforts to address these issues effectively. While long-term investors seeking exposure to the AI solutions space might find C3.Ai appealing, those who have profited from the recent rally should consider booking partial profits at this stage. Avoiding new positions until the company demonstrates more consistent earnings and revenue growth could be a prudent approach. Nonetheless, C3.Ai’s debt-free balance sheet provides room for future investments, which may aid its operations and growth in the high-interest rate environment.
Featured Image: Freepik @ iuriimotov
Author Faith Yakubu