Shares of enterprise AI platform C3.ai (NYSE:AI) have cooled off considerably from their highs in February. Most recently, AI stock plunged after releasing subpar first-quarter results. Investors had high hopes for the company, but it has failed to deliver the kind of growth rates they were expecting.
Though AI stock is reaching the buy zone, it’s still remarkably expensive, making it tough to invest in.
C3.ai had one of the top initial public offerings of the past year, which saw its stock price quadruple. It hit its all-time high of $170 back in February, a near four-fold gain from the $42 IPO price. Since then, it has given back nearly all of that. In the past six months, the stock has generated a negative return of 38%.
However, despite its recent dip, AI stock is still trading at over 21 times forward sales. Though some buy-the-dip opportunities can arise in the future, at this point, the stock is still overpriced.
Operating Performance Behind AI Stock
C3.ai recently posted its first-quarter results where its bottom-line losses widened from the prior-year period. Its revenues rose to $52.4 million, representing a healthy 29% increase on a year-over-year basis. Additionally, subscription revenues of $46.1 million increased by a substantial 29% from the same period last year. At the same time, it posted a massive net loss of $37.5 million compared to a minuscule profit of $150,000 from the prior year period.
Looking ahead, it expects second-quarter revenues to come in at $56 million to $58 million, which is in line with analyst estimates. Similarly, its full-year revenue forecast of $243 million to $247 million is also in line with consensus estimates.
On paper, the top-line results may seem impressive but considering its past performance, and it’s a step backward. Revenues increased 88%, 48%, and 71% in 2018, 2019 and 2020, respectively. However, in fiscal 2021 the company’s revenues rose just 17%. The management has blamed the pandemic-fueled slowdown, which disrupted the energy and industrial markets, accounting for most of its sales.
The company expects its operating losses to widen from $60.3 million to over $107 million in fiscal 2022 as it looks to ramp up its investments. CFO Dave Barter laid out the company’s intention to “invest thoughtfully in headcount in programs to accelerate our revenue growth.”
The Bear Case Is More Compelling
So far, the bear case for C3.ai has won out. For starters, the company has a colossal valuation of over $5.2 billion and trades at over 21x forward sales. Forward revenue estimates are at just 28%, which is considered quite normal in the enterprise software business. Moreover, it relies on a handful of customers to generate revenues.
Its main customer is Baker Hughes (NYSE:BHGE), an oil services giant representing about a third of its revenue. On top of that, you have the company’s sizeable losses, which continue to pile up with every passing quarter. It loses virtually every dollar it makes, in GAAP terms.
Investors have clung to the stock due to AI’s buzz, arguably one of the hottest areas in software today. They also have a lot of confidence in its CEO and founder Tom Seibel, who founded Siebel Systems, later sold to software giant Oracle (NASDAQ:ORCL).
Bottom Line On AI Stock
AI stock has sold off considerably since its highs in February and now trades at around its IPO price of $42. However, despite the sell-off, it is still overbought and unattractive based on its lackluster performance of late.
The performance of its peers is far superior at this point and they are trading at more attractive price metrics. As we advance, C3.ai has a tough road ahead to narrow down its losses and reduce its dependence on a handful of customers for its revenues.
On the date of publication, Muslim Farooque 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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.