C3.ai Stock Has a Big Valuation. But Does It Have Big Upside From Here?
C3.ai (NYSE:AI) stock could have a banner year in front of it.
Companies providing easy-to-implement AI solutions could gain as businesses seek productivity improvement. In this age of rising inflation and increasing wages, productivity gains simply haven’t kept up with companies’ rising costs.
Thus, companies implementing AI-based productivity improvement measures may gain the upper hand among its peer group. That’s the selling pitch of C3.ai, a company that does just that.
Of course, AI stock (given its ticker) has been in hot demand of late. The surge in interest around anything tied to artificial intelligence has led this company’s valuation to balloon.
Now, there are some pretty pertinent questions about its sustainability and potential for investment. Let’s examine whether AI stock makes sense right now for those with a reasonable risk tolerance threshold.
AI Stock and Industry Solutions
C3.ai offers tailored solutions for common challenges in energy management, supply network risk, and inventory optimization. Its main clientele are sourced from the oil and gas (34% of bookings) and defense (29%) sectors. This focus has proven successful.
The stock’s investors are reaping benefits from AI’s popularity with shares surging 266% this year. The company overcame slow growth because of a business model shift.
C3.ai offers a Generative AI product, boosting demand with three deals soon after its Q4 launch. However, it’s also true that C3.ai’s financial statements highlight challenges.
Morgan Stanley’s AI bubble argument focuses on Nvidia’s (NASDAQ:NVDA) 206% surge, exceeding past bubbles’ 154% median rise in three years.
Edward Stanley’s analysis of 70 previous bubbles used Nvidia as an AI proxy. C3.ai, with bigger gains than Nvidia, could be affected by a potential Nvidia stock drop.
Basing an AI bubble claim solely on technical evidence isn’t foolproof. Bubbles arise when stock prices rise without corresponding business value appreciation. Using Nvidia as an AI proxy, as Morgan Stanley does, isn’t apt.
Nvidia’s upcoming Q2 2024 results show significant growth potential, challenging the notion of an AI bubble.
Growth is on the Way
Nvidia targets AI hardware growth, while C3.ai focuses on software. The software market has a 23% annual growth projection and could generate $1 trillion revenue in 2032.
Skeptics say C3.ai missed out due to its fiscal 2023 revenue rise of only 5%, a drop from 38% growth in 2022. This decline was due to a business model change.
C3.ai shifted to pay-as-you-go billing, reducing long-term revenue visibility but easing customer entry. The transition boosted customer agreements and sales pipeline. Anticipated growth acceleration is indicated by a chart for the current fiscal year.
What Now
C3.ai’s surging revenue and earnings could lead to stock growth. Projecting $480 million revenue in 2026, its market cap might rise to $5.4 billion, a 30% increase, signaling more potential for investors.
The stock surge is a bet on a promising AI future, especially in the enterprise sector. Its position in AI solutions and reasonable valuations make it well-positioned for adoption and growth.
I think that investors looking for ways to play the AI trend could certainly consider AI stock, though I think the more prudent thing to do is to be patient with this one.
It’s likely investors will receive an opportunity to buy shares at a lower price once this overly-exuberant market is brought down toward reality. Until then, this is a stock to keep on the watch list.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
