The C3.ai Stock Debate: Overpriced or Underestimated?
In many ways, C3.ai (NYSE:AI) stock has been a tale of two valuations over the last year. Before artificial intelligence became the latest fad due to the public’s fascination with ChatGPT, the valuation of AI stock was quite attractive. For example, on Dec. 1, 2022, the shares were changing hands for roughly 3.9 times analysts’ current average 2024 revenue estimate. That’s a somewhat high valuation, but it was attractive, given the company’s strong prospects and fairly rapid growth.
But now the shares are trading for eight times analysts’ mean 2024 sales estimate. That’s a very extended valuation, particularly in today’s high-interest rate environment when many investors are likely to run for the hills if the company stumbles even a little bit or if the Street’s fascination with AI eases just a tad.
So although I’m very upbeat about AI’s longer-term outlook and I still think that the company could eventually become the Microsoft (NASDAQ:MSFT) of AI, I believe that investors should sell the shares, as they’ll probably get the opportunity to buy them back at much lower prices in the future.
A Strong Outlook and Very Good Growth
As I explained in a previous column, C3.ai focuses on enabling its customers to easily access and utilize AI.” More specifically, as Investor’s Business Daily explained, the firm tries “to make it easier for companies to build artificial intelligence applications with its off-the-shelf tools and avoid costly customization projects.” Also noteworthy is that C3.ai has developed tools for several specific large sectors.
Many, if not most, companies are now looking to incorporate AI amid new appreciation for its power, but few will want to spend the money to employ AI experts full-time. As a result, many firms should be eager to use C3.AI’s offerings.
What’s more, the many companies within the sectors for which AI has developed specialized applications should be especially eager to use its offerings. That’s because those firms should find the sector-specific data and features that C3.ai has loaded into the applications extremely useful.
Given those points, it’s not surprising that C3.ai has recruited many impressive customers, including oil exploration giants Shell (NYSE:SHELL) and Baker Hughes (NASDAQ:BKR), the gigantic insurer, Liberty Mutual, the European energy giant, Engie (OTCMKTS:ENGIY), and a huge accounting firm, EY.
On the growth front, C3.ai’s backlog rose 7% in its last reported quarter versus the previous reported quarter. Its top line increased to $194.4 million in the nine months that ended in January from $180.4 million during the same period a year earlier.
An Extended Valuation and Better Alternatives
Given the high valuation of AI stock and the current macro environment, the shares could easily drop tremendously if the company stumbles at all. For example, if it loses a key customer or its quarterly results come in below analysts’ average estimates, the shares could very well tank. Or more evidence could arise to support the allegations of short seller Kerrisdale Capital against C3.ai. Earlier this month, Kerrisdale alleged that there had been improprieties involving AI’s accounting.
Additionally, Wall Street could become less enamored with AI, causing C3.ai’s shares to take a big hit. I’ve seen multiple. Other sectors, such as solar, EVs, cloud computing, social media, and housing, undergo “boom and bust cycles.”
Finally, there are a few AI stocks with lower valuations and higher ceilings than C3.ai. In this category, as I explained in a previous column, are Schrodinger (NASDAQ:SDGR), Lemonade (NYSE:LMND), and Aurora Innovation (NASDAQ:AUR). The forward price-sales ratios of SDGR and LMND are six times and two times, respectively, versus AI’s eight times. AUR has a much higher price-sales ratio than AI, but AUR’s market capitalization is just $1.56 billion, versus AI’s $2.45 billion. What’s more, AUR has a truly gargantuan opportunity in the autonomous-trucking space.
As of the date of publication, Larry Ramer owned shares of SDGR and AUR. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.