3 reasons to buy C3.ai stock and 3 reasons to sell

when C3. ai (Amnesty International -0.61%) It went public on December 9, 2020, and generated such buzz for three reasons: It was growing rapidly, and it was founded and led by technology veteran Tom Siebel (who sold his previous company, Siebel Systems, to inspiration), and it had an attractive bar symbol. These factors, along with a buying frenzy in growth and meme shares, propelled C3.ai from its initial public offering price of $42 to an all-time high of $177.47 less than two weeks later. But today, it’s trading at around $13 a share.

The bulls abandoned C3.ai as its ratings peaked, its revenue growth slowed, and its losses widened. Rising interest rates have exacerbated this pain by keeping investors away from pricier growth stocks. But could C3.ai make an unexpected comeback this year? Let’s review the top three reasons to buy C3.ai – plus three compelling reasons to sell it – to make your decision.

Android office workers using laptops in the office.

Image source: Getty Images.

The three reasons to buy C3.ai

C3.ai develops artificial intelligence algorithms that can be integrated into an organization’s existing software infrastructure to automate tasks, improve employee safety, reduce costs, and detect financial fraud. It provides these services as additional algorithms and pre-built stand-alone services. The bulls are holding on to C3.ai for three reasons: it’s still gaining new customers, its revenue growth is expected to pick up again, and its stock looks a lot cheaper than it did at the height of the meme’s stock rally.

C3.ai file terminated Second Quarter of fiscal year 2023 (which ended last October) with 236 customers, compared to 228 customers in the previous quarter and 203 customers the previous year. secured new partnerships with the US military, the alphabet‘s (The Google 2.32%) (GOOGL 2.12%) Google Cloud and Microsoft (MSFT -1.65%) over the past year.

As for C3.ai revenue, which is expected to rise just 1% to 2% in fiscal 2023, Siebel predicted during its recent conference call that it could “return to a growth rate of greater than 30% annually over the next 18 months.” She expects that momentum to return as macroeconomic headwinds wane and large organizations ramp up their software spending again.

The C3.ai enterprise, at an all-time high, was valued at $16.7 billion – which is 91 times the $183 million in revenue it will generate in fiscal 2021. $491 million – less than twice its projected sales for fiscal 2023. Also sold It’s less than 8% from its float as of Dec. 29, so bears don’t expect it to drop further in the near term.

The three reasons for selling C3.ai

C3.ai stock looks less bubbling now, but customer focus problems, its sudden move from subscriptions to usage-based fees, and its shrinking margins all suggest its business is still in serious trouble.

C3.ai generates nearly a third of its revenue from a joint venture with the energy giant Baker Hughes (BKR -0.65%). This partnership will expire in fiscal 2025, and there is no guarantee that it will be renewed. Baker already lowered made its annual revenue commitments to the joint venture through two renegotiations with C3.ai in 2020 and 2021, and sold about 15% of its stake in C3.ai last year. Uncertainty about C3.ai’s future with Baker is likely to keep the speculators from running high — even as the company secures new partnerships to offset the potential loss of C3.ai revenue.

For its business model, C3.ai initially used a subscription-based model. But last August, C3.ai said it would pivot toward a usage-based model, which charges customers only for the services they access. Siebel claims this change gives it more flexibility as large companies rein in their spending to deal with overall headwinds, but it’s also likely to reduce their revenue per customer and the stability of their ecosystem. That’s why investors should take Siebel’s predictions of a return to 30% growth with a grain of salt — especially after it repeatedly lowered its guidance for fiscal 2023 over the past year.

Meanwhile, both C3.ai’s gross and operating margins are heading in the wrong direction as it takes advantage of more promotions and trials to attract customers. That’s why analysts expect C3.ai to remain very unprofitable for the foreseeable future.

AI Gross Margin Chart.

Source: YCharts.

The risks outweigh the potential gains

C3.ai is not doomed yet, but the bearish hypothesis is more plausible than the bullish one. Unless it can weather overall headwinds, renew its deal with Baker, and stabilize its margins, there’s no reason to think it’s a bargain at these levels.

Susan Fry, an executive director at Alphabet, is on the board of directors of The Motley Fool. Liu Sun He has positions in the alphabet. The Motley Fool has and recommends positions at Alphabet and Microsoft. The Motley Fool recommends C3.ai. The Motley Fool has a Disclosure policy.

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