The advantage of being a long-term investor is that it gives you time to change your mind when the facts require it. C3.ai(NYSE:IA) didn’t have the most impressive fundamental qualities a year or two ago, but the company has made progress to the point that it’s time to give it recognition as a potential stock investment.
There aren’t many companies that sell artificial intelligence (AI) application software to governments and businesses, and while Palantir Technologies(NYSE:PLTR) has garnered the most attention to date, C3.ai has become a stock to watch.
Start your mornings smarter! Wake up with Breakfast News in your mailbox every market day. Register for free »
Here’s why C3.ai caught my attention and whether investors should consider buying the stock now.
It is becoming increasingly clear that organizations want to use AI technology. Palantir gets a lot of attention and has publicly touted how well it Artificial Intelligence Platform (AIP) Accelerates Growth in all its sectors of activity. Although smaller and less hyped, C3.ai is a competitor that offers a development platform and finished software for AI applications in various industries.
Palantir deserves credit for its success, but one could argue that AI is a rising tide and lifts many boats:
No, C3.ai is not growing as fast as Palantir. Nonetheless, the company managed to recover from a difficult period between 2022 and early 2023, including headwinds from rapidly rising interest rates and a change in its billing model that dampened revenue growth.
Like Palantir, C3.ai deserves credit. Last quarter, the company generated 16% of its revenue from professional services, primarily the fees customers pay to extract desired products and features through C3.ai’s engineering pipeline. In other words, C3.ai customers see enough value in this software to buy it, then pay more to get it faster.
This highlights both the demand for C3.ai’s technology and its quality.
C3.ai’s poor finances have been its biggest obstacle. After all, rival Palantir is comfortably profitable under generally accepted accounting principles (GAAP), while C3.ai’s trailing 12-month GAAP loss is $278 million, almost as much as its $325 million. dollars of revenue. The biggest culprit is stock-based compensation, which accounts for nearly $220 million of that deficit.
The good news is that things might get better from here.
C3.ai’s revenue growth is accelerating, while its expenses are slowing. They run in opposite directions, which is a good thing. Additionally, C3.ai generated $26.1 million in free cash flow over the past two quarters. The company has cash of $762 million and zero debt. It is a financially stable company, although its GAAP losses will likely continue to weigh on the stock’s valuation.
If management can contain or reduce its stock-based compensation expenses and continue its current trends, C3.ai could move toward profitability.
So, growth is accelerating and there is a realistic path for C3.ai to significantly improve its finances. Are things moving enough in the right direction for the stock to be a Buy today?
I have concluded in the past that Palantir’s superior financials gave its stock an edge over C3.ai, but that has become a harder argument to make. Palantir’s valuation has gone to the moon, creating a divide between the valuations of C3.ai and Palantir:
Remarkably, Palantir’s price-to-sales (P/S) ratio has even surpassed its peak during the 2021 stock market bubble. Palantir stock deserves a premium to C3.ai, but trades at over 4 times the valuation of the latter seems excessive, so to speak. it’s slightly. Choosing between buying each stock at their respective prices today, I believe C3.ai will outperform Palantir in the future.
Sometimes evaluating whether a stock is worth buying requires context. That’s why I included Palantir, arguably the company closest to C3.ai, in this discussion. I don’t think C3.ai’s fundamentals are as good as Palantir’s, but the company appears to be heading in the right direction, an encouraging sign for long-term investors.
The company’s improving fundamentals and significantly more attractive price make the stock a buy today.
Before buying shares in C3.ai, consider this:
THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and C3.ai was not one of them. The 10 selected stocks could produce monster returns in the years to come.
Consider when Nvidia made this list on April 15, 2005…if you had invested $1,000 at the time of our recommendation, you would have $833,545!*
Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THEEquity Advisorthe service has more than quadrupled the return of the S&P 500 since 2002*.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
