C3.ai (NYSE:AI) stock last year became one of the more popular AI plays out there. Compared to other top AI stocks, C3.ai is a considerably smaller enterprise. The stock has a market cap of just $3 billion, and this year the company should generate just $305.5 million in revenue. At the same time, this enterprise isn’t a fly-by-night operation.
Founded by billionaire software entrepreneur Thomas Siebel, and in business for 15 years, I can see why the bulls believe C3.ai could be a dark horse contender in the race to dominate the AI software market. This AI longshot has low chances of success compared to more established AI names.
AI Stock: Mostly Hope and Hype
Admittedly, there is some substance to the C3.ai bull case. Beyond the factors listed above, there’s the fact that it quickly capitalized on the generative AI trend. As you may recall, last January, the company launched its C3 Generative AI Product Suite.
C3.ai also has an existing enterprise AI business, which, while not yet profitable, grew rapidly during the late 2010s/early 2020s. Compared to early-stage AI contenders, this is not an “also-ran” name in the space. Still, while perhaps in the middle of the pack, that’s, of course, not the same thing as being a front-runner.
The problem, however, is that many in the market are treating AI stock like it is on the verge of leaping toward the head of the pack. Bulls have partially priced in the prospect of C3.ai rapidly cashing in on the generative AI software trend, and shares would likely soar again if such a scenario played out.
Unfortunately, with this aspect of the bull case, recent financials suggest that hope and hype, not substance, is all there is backing it up.
Shares Are at Risk of Taking a Big Tumble
Last month, C3.ai released its latest quarterly results, along with updates to guidance. Revenue came in at the low end of prior guidance. Although net losses were narrower than prior forecasts, updates to guidance fell short of expectations.
Sure, the company had plenty to tout in the earnings release. On a sequential basis, revenue growth accelerated, from 11% to 17%.
C3.ai also reported an 81% jump in “customer engagement,” suggested to be a leading indicator of revenue growth ahead. Still, investors reacted negatively, as seen with the performance of AI stock post-earnings.
This makes sense. Another high-profile AI software company, Palantir Technologies (NASDAQ:PLTR), is also experiencing customer growth far outpacing revenue growth. Yet as I argued recently, even with this burgeoning customer count, it’s very uncertain whether this will translate into a big growth resurgence for Palantir.
The same may apply here for C3.ai. Unlike PLTR, which is consistently profitable, AI’s future growth may not be enough to sustain its valuation.
Bottom Line: For AI Exposure, Stick to the Better Bets Out There
Considering how much C3.ai has had to walk back earnings and growth expectations, forgive me for being doubtful that 2024 is going to be C3.ai’s “year of AI.”
Forgive me for being doubtful that this year will be a banner one for Palantir, either. For now, it appears turning the generative AI trend into high revenue/earnings growth is a lot easier said-than-done.
Contrast this with the almost-instantaneous success the AI chips industry is having capitalizing on this trend. Stocks like Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) appear to be more solid ways to wager on the “future of AI,” with a high level of upside potential to boot.
As AI stock (after dropping considerably from its 2023 highs) could cough back more of its gains, skip on it, and stick to your stronger options.
On the date of publication, Thomas Niel did not hold (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.
