The descent of C3.ai's stock may persist until this particular pattern ceases.
C3.ai (AI's stock performance -4.26%) serves as a provider of software that includes AI applications designed to aid businesses in automating and enhancing their operations. Given the growing demand and interest in AI, this stock should ideally be flourishing. However, the shares have been less appealing to investors this year, with a 13% decrease in price.
Investors might be displeased with the returns they've seen from their investment in the company. Nevertheless, I don't think the stock will recuperate until one concerning trend is rectified.
C3.ai's lack of profitability poses a significant issue
Even for rapidly expanding companies, investors often tolerate some degree of unprofitability because they understand that a company isn't yet at its peak. However, C3.ai isn't a startup with limited earnings; with sales of $325 million in the previous year and losses totaling $278 million, the company isn't exactly new to the scene.
The following graph illustrates a concerning trend – while C3.ai's revenue has grown in successive quarters, so have the losses. Generally, investors anticipate a reduction in the net loss relative to revenue instead of an increase. Unfortunately, this isn't the case with C3.ai. The company has been allocating substantial resources for research and development, as well as marketing efforts related to AI, which has had a direct impact on the company's bottom line. This unfortunately coincides with a time when significant improvement was hoped for.
Financial difficulties can lead to more share offerings and dilution
If a company is grappling with profitability, it usually indicates that its operations are unsustainable. Added to that, it may not be generating enough cash to cover its daily expenses. Consequently, the business may be forced to raise capital through the debt or equity markets. Equity offerings tend to be more attractive because they don't accrue interest costs.
C3.ai has been experiencing a cash drain of $58 million from its operations over the last four quarters, which is not a new problem for the company. Not surprisingly, the company's share count has been consistently rising. The risk remains that if the company's financial situation doesn't improve, further dilution may be on the horizon, which could potentially lead to a further decline in the stock price, despite the current underperformance.
Is C3.ai stock a worthwhile investment?
With a relatively modest $3 billion valuation, C3.ai's growth might entice some investors to invest in the stock. However, the business is not progressing in a manner that inspires confidence in its ability to become profitable in the foreseeable future. As long as this persists, the investment will remain volatile and risky.
Merely generating revenue to boost the top line may not be enough to motivate investors to remain optimistic about the business in the long term. In my opinion, it would be unwise to invest in C3.ai, as there are numerous other AI stocks that can be significantly better options for those interested in investing in tech companies benefitting from the AI revolution, and whose operations are already profitable.
Investors might be questioning the wisdom of their finance decisions, given the inconsistency between C3.ai's increasing revenue and escalating losses. The company's continuous allocation of money towards research and development and marketing, coupled with the lack of significant improvement in the net loss, could be a cause for concern in the investing world.
Given C3.ai's current financial situation and the increased share count due to potential future dilution, potential investors might find more stable and profitable AI stocks more appealing, bypassing C3.ai as a worthy investment option.
