Did C3.ai Just Become a Top Artificial Intelligence (AI) Stock to Buy?

Did C3.ai Just Become a Top Artificial Intelligence (AI) Stock to Buy?

C3.ai (NYSE:IA) is a polarizing action on artificial intelligence (AI). It generated a lot of excitement at the start of 2023, but that enthusiasm has since evaporated, with the stock sitting more than 30% off its highs set in 2023. However, that figure was just 55% in April , the title is therefore gaining ground. a little more enthusiasm.

This is partly due to C3.ai’s results, as parts of its business are starting to prove the skeptics wrong. But is it enough to convince more investors to buy this stock?

Demand for C3.ai products increases

C3.ai has evolved significantly as a company since its founding in 2009. It has evolved from an energy management business to an Internet of Things (IoT) and then an AI applications business. However, his latest change launched into generative AIwhich, according to management, “will change everything”.

The company offers pre-built AI models that can be deployed in common situations found across many industries. This is an attractive proposition for many companies because they don’t need to hire software engineers to develop custom models. One of C3.ai’s largest emerging customers is the U.S. government, which accounted for nearly half of the company’s bookings during the fourth quarter of its 2024 fiscal year, which ended April 30.

In the press release announcing its results, management said: “The interest we are seeing in our generative AI applications is astounding. » This confirms what other AI companies like Palantir Technologies said, and this bodes well for the future of C3.ai. But even now, C3.ai seems to be turning over a new leaf.

Strong growth but far from profitable

In the fourth quarter, revenue increased 20% year over year to $87 million. This is a solid acceleration in growth compared to previous quarters and is a good sign for growth investors.

Did C3.ai Just Become a Top Artificial Intelligence (AI) Stock to Buy?

AI Revenue Chart (YoY Quarterly Growth)

But the fourth quarter won’t be C3.ai’s high point. Management also released fantastic guidance and expects the first quarter of fiscal 2025 (ending July 31) to be around $87 million, or 20% growth. For the full year, it projects about $383 million, which would represent 23% year-over-year growth. Clearly, management expects its revenue growth to accelerate even further after the first quarter, which is pleasing to investors’ ears.

However, there is a downside to C3.ai stock. The company is one of the least profitable companies in the software industry. Although it generated nearly $87 million in revenue in the first quarter, the cost of that revenue was $35 million and its operating expenses totaled $134 million. In total, this gave C3.ai an operating loss margin of 95%, meaning it would need at least double its current revenue to break even without increasing expenses.

AI Operating Margin Chart (Quarterly)AI Operating Margin Chart (Quarterly)

AI Operating Margin Chart (Quarterly)

This is not good for investors and perpetuates a trend of deep unprofitability. Climbing out of such a deep hole can take years, and some investors aren’t patient enough to wait for C3.ai to flip the profitability switch.

There is, however, one hope: C3.ai is a small company. Its quarterly revenue was only $87 million, which is quite low compared to other AI software companies like Palantir. As a result, its high unprofitability is a side effect of its desire to capture as much market share as possible. While I’m not a fan of its unprofitability, that makes it somewhat acceptable.

So, should I buy the stock? Currently none. I’m not a fan of high losses at C3.ai’s current growth levels. If C3.ai doubled its revenue year over year, I’d be willing to look beyond that. However, C3.ai is a much more attractive stock than it was just a few months ago, thanks to its strong guidance and accelerating revenue. It’s starting to emerge as one of the best choices in AI and could even move into buy territory (for me) after a few quarters of solid growth and improving profitability.

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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Palantir Technologies. The Motley Fool recommends C3.ai. The Mad Motley has a disclosure policy.

Has C3.ai Just Become One of the Top Artificial Intelligence (AI) Stocks to Buy? was originally published by The Motley Fool

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