The hype around generative artificial intelligence has been the rising tide that has lifted many boats, including C3.ai (AI), which has plunged into serious controversy and may find itself stranded once the tide goes down. Continue reading.
Shares of C3.ai, Inc. (AI), which rode the hype around generative AI after ChatGPT, the AI chatbot launched by Open AI in late November 2022, took the world by storm to become the fastest growing app. fastest in history.
This collapsed recently when the seller shorted Kerrisdale Capital sent a letter to Deloitte & Touche LLP, AI’s auditor, detailing serious accounting irregularities that are attracting investors’ attention. The company has been accused of numerous dishonest accounting practices, such as inflating gross profit margins by shifting expenses to different categories. Right on cue, the stock plummeted 26% on Tuesday.
Additionally, AI’s stock was down 15.5% during the day to close the last trading session at $21.09. Although the stock has gained 56.3% over the past six months, an already declining popularity, the stock has lost 26% over the past month. He has a 27.30% short float.
On January 31, AI announced the launch of its generative AI product suite. Although the company has yet to find a path to profitability, AI seeks to differentiate itself from other vendors who only provide piecemeal solutions by providing an end-to-end platform as a service to develop , deploy and operate industry-specific turnkey AI applications at scale.
Regardless of the merits of recent allegations of accounting impropriety against AI, let’s dig deeper into its fundamentals as they are currently available in the public domain.
Dive into financial performance
For the third quarter of fiscal 2023, which ended January 31, 2023, AI’s total revenue decreased 4.4% year-over-year to $66.67 million. dollars, while its non-GAAP gross profit fell 8.6% year-over-year to $50.96 million.
During the same period, AI’s non-GAAP operating loss was $15.03 million, while its non-GAAP net loss was $6.16 million. dollars, or $0.06 per share.
AI’s total assets were $1.10 billion as of January 31, 2023, compared to $1.17 billion as of April 30, 2022.
Although the last 12 months of AI Gross margin of 70.46% is 39.9% higher than the industry average of 50.35%, the company has yet to operate at scale and achieve sufficient penetration in the enterprise AI software market for its gross profits offset its operating expenses.
AI’s trailing 12-month EBITDA and negative net income margins of 101.14% and 98.35% compare unfavorably to respective industry averages of 9.78% and 2.71%.
In terms of 12-month ROCE, ROTC, and ROTA, AI underperforms even the modest industry averages of 2.65%, 2.06%, and 0.67%, respectively.
Despite the recent price drop, AI is still trading at valuations the company may struggle to justify for the foreseeable future.
In terms of EV/Futures, AI is trading at 7.60x, 174.8% higher than the industry average of 2.77x. Additionally, the stock’s forward price/sales multiple of 10.55 compares unfavorably to the industry average of 2.70.
Analysts expect AI’s revenue for the fourth quarter of fiscal 2023, ending April 30, to be $71.07 million, indicating a decline of 1.7% from one year to the next. Over the same period, the company’s loss per share is expected to be $0.18.
Street expects the company to continue reporting net losses through fiscal 2025.
POWR ratings reflect weakness
AI’s fundamental weakness is reflected in its overall D rating, which equates to Selling in our own POWR Rankings system. POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary scoring system also rates each stock against eight different categories. AI has a D rating for value and quality, due to its stretched valuation and lower profitability compared to its peers.
AI also has a D rating for stability, consistent with its beta of 1.40 and a relatively wide spread between its 52-week high and low prices of $34.68 and $10.16, respectively.
Unsurprisingly, AI is ranked second to last of the 23 stocks in the Software – SAAS industry.
Beyond what has been discussed above, additional ratings for AI growth, momentum and sentiment can be found here.
Notwithstanding recent controversy and in addition to macroeconomic headwinds making the near-term outlook for growth companies such as AI uncertain at best, the company is also adjusting to the strategic changes it has put in place. works in its pricing model and commercial organization.
AI has moved from a subscription-based pricing model to a consumption-based pricing model. While the company believes this change would increase the number and frequency of small transactions from a broader customer base for long-term revenue growth, potential spending cuts by high-profile customers during a likely economic downturn could put the short-term effectiveness of the model in question.
Therefore, given the above, we think it would be wise to avoid fundamentally weak AI until its prospects become clearer.
Actions to consider instead of C3.ai, Inc. (AI)
Unfortunately, the chances of AI outperforming in the weeks and months to come are greatly compromised. However, there are plenty of stocks in the software industry – SAAS with impressive POWR ratings. So, you can consider these three A-rated (strong buy) or B-rated (buy) stocks instead:
Informatica Inc. (INFA)
Park City Group, Inc. (PCYG)
MiX telematics limited (MIXED)
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AI shares were unchanged in premarket trading on Thursday. Year-to-date, AI has gained 88.47%, compared to a 6.99% rise in the benchmark S&P 500 over the same period.
About the Author: Santanu Roy
Fascinated by the traditional and evolving factors that influence investment decisions, Santanu decided to pursue a career as an investment analyst. Before moving into investment research, he was a process associate at Cognizant. With a master’s degree in business administration and a fundamental approach to business analysis, he aims to help retail investors identify the best opportunities for long term investment.
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