Can this promising artificial intelligence company continue its wild rise in share price?
The price of C3.ai (AI -3.21%) stock will increase significantly in 2023 as a result of the recent buzz surrounding artificial intelligence (AI). As investors have become more aware of the rising demand for AI applications, shares of this pure-play enterprise AI software supplier have increased by 123% so far this year. Recent events, however, raise the possibility that the company’s fantastic stock market surge may be in jeopardy, at least in the near future.
This week, a report from short-seller Kerrisdale Capital accused C3.ai of accounting fraud, and the stock dropped sharply in response. In order to seem as a software-as-a-service firm when it is actually a consulting services provider, C3.ai allegedly overstated its revenue and margin. According to the research, this gave C3.ai a market worth that was overstated. In addition, Kerrisdale notes that the company’s accounts receivables increased far more quickly than revenue, raising the possibility that C3.ai is fabricating income to satisfy Wall Street’s demands.
Investors are awaiting a response from C3.ai management since Kerrisdale has leveled severe claims against the company. It remains to be seen whether these accusations are credible.
What happens if C3.ai is found not guilty? Should investors consider taking advantage of the recent share price decline in the hope of further gains? Let’s investigate.
The C3.ai stock may encounter short-term challenges.
The stock may have outperformed itself based on C3.ai’s financial results. The business reported revenue of $69.8 million for the third quarter of its fiscal 2023, which ended on January 31. That was a slight increase above the $66.7 million in revenue from the same time last year.
The midpoint of the company’s guidance range for full-year sales is $265 million. That would result in an only 5% increase over the $252.7 million in sales for the fiscal year 2022. Therefore, C3.ai’s growth is insufficient to support its high price-to-sales ratio of 10.
Additionally, according to analysts’ share price projections, C3.ai might not be able to continue its recent success. The median price objective for the stock, which is followed by nine analysts, is $21, or 15.8% less than its current price.
All of this suggests that it would not be a good idea to purchase C3.ai stock at its present price. Investors would be overpaying for a business that isn’t anticipated to experience significant growth this fiscal year and that needs to make amends for the alleged accounting mistakes made by Kerrisdale. It’s also conceivable that C3.ai will be corrected. But if that’s the case, astute investors may have the chance to purchase this AI play later on at a lower price, and doing so would be prudent.
Purchasing the stock when it is on sale will be wise
Due to a change in the business model, C3.ai is expected to record modest growth in the fiscal year 2023. The business has been making the switch from a subscription-based model to one based on usage. The management expects that this will hasten the uptake of its enterprise AI software solutions, shorten the sales cycle, and increase revenue and profitability.
C3.ai will experience some short-term pain as a result of the shift, but the business is still sure that using a consumption-based pricing model will be the best course of action because it will free its clients from binding agreements. Customers will no longer need to haggle over subscription pricing with C3.ai thanks to the shift; instead, they can just pay for services in accordance with their demands.
The good news is that the company has already begun to benefit from the switch to consumption-based pricing. Deals were closed more frequently in the third quarter of the current fiscal year by 35%. And C3.ai closed 20 deals with a price tag of less than $1 million in the most recent quarter, up from 12 in the same period previous year. This would mean that the business has made it easier for new clients to buy its enterprise AI software, which seems logical given the enormous potential in this market.
According to Mordor Intelligence, the enterprise AI industry will expand at an accelerated annualized rate of 52% through 2028. It’s also important to note that by 2026, the total addressable market for C3.ai might reach a staggering $791.5 billion. In light of this, and based on its projected revenue for the fiscal year 2023, the company is now simply scratching the surface of a sizable opportunity.
This also explains why C3.ai expects its revenue growth to pick up speed beginning in fiscal 2024 as the company moves closer to its consumption-based business model and investment on AI software increases.
Additionally, C3.ai believes that using the consumption-based pricing model will increase its margins and boost its profitability. For instance, instead of expecting a $81 million loss at the beginning of the year, the company now projects a $71 million non-GAAP loss for fiscal 2023. In the fourth quarter of fiscal 2024, C3.ai projects a non-GAAP operating margin of 2%, which would be a significant improvement over the negative 23% margin it had in the previous quarter. The long-term non-GAAP operating margin target for the corporation is 20%.
This also explains why analysts anticipate C3.ai’s bottom line to significantly improve from its adjusted loss of $0.73 per share from the previous fiscal year.
Even better, over the next five years, C3.ai is predicted to produce earnings growth of 50% yearly. Given the solid end-market opportunity it is sitting on and the potential bottom-line growth it might generate through its change to a consumption-based revenue model, investors looking to purchase an AI company for the long term should consider accumulating C3.ai on dips. Naturally, investors should also pay attention to how C3.ai management responds to the accusations of accounting fraud.