As artificial intelligence (AI) investing becomes mainstream, one of the first stocks to emerge is C3.ai (AI 6.35%), mainly because of the AI rights in its name. But is it one of the best ways to invest in the AI revolution? Or is there a better way to get in touch with this space?
High concentration is dangerous
C3.ai has enterprise AI solutions including plug-and-play energy management, inventory optimization, and anti-money laundering programs. These programs fit into various business software suites such as customer relationship management (CRM) and enterprise resource planning (ERP) to help clients become more efficient.
C3.ai has products for multiple industries, but is surprisingly focused on one industry: oil and gas. In the third quarter of fiscal year 2023, which ended January 31, 72% of bookings came from this sector, with the second largest contributor coming from the Federal, Aerospace & Defense segment, at 16%. was. This focus comes from our relationship with Baker Hughes, an oilfield services company owned by Baker Hughes. general electricHowever, this could also be seen as a risk should Baker Hughes end the partnership.
Moreover, with three separate customers accounting for more than half of C3.ai’s revenue for fiscal year 2022 (ending April 30, 2022), concentration risk is certainly high. But it also opens up another possibility. What if C3.ai was able to get hundreds of these customers? There are some companies willing to spend
One of the recent wins was a $500 million contract with the US Missile Defense Agency from the Department of Defense, which will last for five years. It helps C3.ai to diversify away from a few customers, as more and more customers commit to his C3.ai, the product becomes more utilized in different industries.
However, C3.ai’s financial situation does not support this optimistic outlook.
why is my income going down
Revenue in the third quarter was $66.7 million, down from $69.8 million a year ago. This should be a red flag for all growth investors, but be careful. C3.ai is in the midst of a business transformation from a subscription model to a consumption model where clients are only charged for using their product.
As a result, revenue declined as existing customers did not utilize the product sufficiently to offset the increased subscription price. Management believes the move will encourage customers to use the company’s products more. However, this is also risky as clients may cut back on usage during economic downturns.
Still, this transition will be something to watch over the next year to see if it starts to have a positive impact on financials.
C3.ai is a very young company and is quickly losing money, which shouldn’t surprise investors. The company is trying to capture a piece of a large market and is willing to sacrifice short-term profitability for long-term market share.
However, stocks are highly valued for business performance.
With almost 10x sales growth, C3.ai is essentially trading on the expectation that it can grow its customer base significantly over the next five years and generate rapid revenue growth. I believe C3.ai has a tool to do that, but it’s very risky with 3 clients in the middle.
If you want to buy C3.ai stock for the future, I don’t think it’s bad, but keep your position size relatively small due to the high risk. Palantir Technologies Before purchasing C3.ai, I would like to review its inventory.
Keithen Drury has no positions in any of the mentioned stocks. The Motley Fool invests in and recommends Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool’s U.S. headquarters has a disclosure policy.