C3.ai‘s (NYSE: AI) stock soared to an all-time high of $177.47 on Dec. 22, 2020 in the midst of bullish fervor before plummeting to a 40% slump below its IPO price at $25. The once-gleaming outlook for this artificial intelligence (AI) software specialist has dimmed, and there are substantial reasons to believe this trend could continue.
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C3’s Reliance on Expired Ventures
C3 draws approximately 30% of its revenue from a joint venture with energy behemoth Baker Hughes (NASDAQ: BKR). This crucial collaboration is slated to terminate in fiscal 2025, and given the recent renegotiations and signs of an association with C3.ai’s competitor Augury, there exist substantial concerns about the renewal or modification of this deal.
The Shrinking Competitive Moat
C3’s focus on AI algorithms provides services parallel to those offered by other major companies such as UiPath (NYSE: PATH), Salesforce (NYSE: CRM), Amazon (NASDAQ: AMZN), and Microsoft (NASDAQ: MSFT). The intense competition in this packed field poses a threat to C3’s differentiation and market standing.
Margin Sacrifices for Bandwagon Boarding
C3’s rebranding from C3 Energy to C3 IoT to an “AI” company, coupled with its ambitious R&D and marketing expenditures, indicates a willingness to compromise margins in order to capitalize on emerging trends. Moreover, its shift to usage-based fees has raised doubts about its profitability and customer retention.
Questionable Valuation
Despite forecasting revenue growth of 11%-20% in the next fiscal year, C3’s trailing revenue growth, in addition to its current enterprise value of $2.2 billion, implies that the stock remains relatively expensive in comparison to its peers. The middling growth and high valuation suggest it may not be a compelling investment opportunity at this juncture.
Searching for Value in AI Stocks
While C3.ai continues to attract attention, investors may be wise to explore alternative AI stocks. Given C3’s precarious position in terms of customer concentration, unpredictability of growth, and substantial losses, caution is urged for potential investors.
Is investing $1,000 in C3.ai right now the right move for you?
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Microsoft, Salesforce, and UiPath. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.