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Could C3.ai stock impress Wall Street with a 130% return this year?


Invest in C3.ai (NYSE:AI) stock could have been a straightforward proposition for 2022. Artificial intelligence (AI), big data analytics, and machine learning are arguably some of the top trending words in most board meetings, as business leaders strategize to future-proof their business models, improve efficiency and create new skills. Unfortunately, AI’s stock price has fallen 87% from its all-time highs recorded in 2021. And Wall Street analysts appear to be split on whether C3.ai’s stock should make the list. buying from anyone right now.

Source: c3.ai

C3.ai is a leader in the emerging enterprise AI space. It offers an AI application development suite, data analytics software, and sells a portfolio of industry-specific AI applications to a growing list of industries through subscription contracts. software as a service.

Shares are in free fall, even as the company reports revenue growth rates north of 40% year-over-year.

Why is AI stock dropping as its business grows?

A recent report on short sellers from Spruce Point Capital Management is not helping C3.ai’s stock price rally at this time. However, stocks were on a downward trajectory long before the report. The house has not been in good condition for some time.

C3.ai’s business is obviously booming, at least on the revenue side, but the income statement is getting too ugly with each successive quarter. It’s unclear whether the stock is a good investment candidate at this time.

The company is a rapidly growing machine learning company, this fact is not debatable. A nice 41% year-over-year quarterly revenue growth rate reported in December 2021 speaks to C3’s high growth status. Management was even pleased that the results exceeded market expectations. However, stocks did not respond favorably.

Despite the fact that stocks of tech companies that went public during the “best times” of 2020 were grossly overvalued and in need of correction, AI stock investors must ignore the disappointing reality of increasingly poor earnings reports.

C3.ai operating costs are growing exponentially faster than revenues. Rising costs destroy profits and gobble up cash flow. C3.ai’s revenue is growing impressively, but operating income is taking a nosedive, resulting in the worst negative profit margins seen since the company went public.

A snippet of quarterly revenue and operating profit for the periods between December 2020 and October 2021 helps illustrate the problem with AI stocks.

Skyrocketing Operating Costs Drive C3.ai Stock Down
Could C3.ai stock impress Wall Street with a 130% return this year?

Source: TIKR.com

Interpreting C3.ai Revenue and Operating Results Data

As can be seen in the table above, every additional dollar of revenue added to turnover increased the total operating loss by more than a dollar. So growth kind of seems like an undesirable outcome right now.

For example, in the quarter that ended October 2020, the company had revenue of $41.34 million and reported an operating loss of $14.52 million.

A year later, in the same quarter in 2021, C3.ai added another $16.92 million to the revenue line to post 41% year-over-year growth to $58.3 million of dollars. However, quarterly operating losses increased by $41.16.

Therefore, an additional dollar of revenue increased operating losses by $2.43. This is not an encouraging sign for bulls. In fact, the data point reinforces bears’ resolve that C3.ai stock may still be overvalued.

Larger losses help explain the high short-term interest on IA shares, which has risen since the middle of last year. The data of the StockRover the fundamental data platform indicates short interest at 19.2%. A significant number of traders believe that stocks will continue to decline in the short term.

Wall Street analysts widely divided on IA stock valuation

As it stands, analysts’ opinions on the company’s fair value diverge widely. This is particularly evident in the insane range between analysts’ lowest and highest price targets on AI stocks.

These targets range from $35 per share to $103 per share. An average price target of $59.13 indicates a potential upside of 156% over the next 12 months. However, given the wide variance in analyst targets, investors should take the implied return potential with a grain of salt. AI’s stock price may never hit analysts’ price targets in the next 12 months.

Among other valuation considerations, mounting losses and persistent negative cash flows are fueling wide differences of opinion among professionals who follow the company.

Additionally, there are growing concerns about the quality and sustainability of the company’s earnings. Specifically, a 32% growth in subscription revenue in the last quarter fell short of analysts’ expectations. Subscription revenue is largely recurring. They offer better visibility on the future results of the company. This is different from volatile professional services sales which can disappear in any random quarter.

The fair value of a growth stock is largely made up of the present value of its future growth opportunities. Therefore, poor visibility on the path to profitability and sustained cash flow generation on AI stocks leads to higher divergence in the expected values ​​and levels of the associated risk measures used to discount the projected numbers.

No one knows when the company might start generating profits for investors, let alone rack up positive cash flow.

Key takeaway for investors

C3.ai is going through one of the riskiest growth phases of its business life cycle. There is no guarantee that massive hiring, aggressive marketing and expanding operating capacity will drive the company’s long-term growth. Customer growth may lag behind cost increases and the business may never achieve profitability.

That said, investors bullish on AI, big data analytics and machine learning being pillars of future business agility, can buy C3 shares now as they give in to selling pressure. and persist over the long term.

Investors shouldn’t take Wall Street’s price targets for IA shares too seriously, however. Analysts have been adjusting their price targets on the company’s shares downward for more than a year. They will likely do so again in 2022 if stocks trade lower or sideways for much longer.

As of the date of publication, Brian Paradza had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

Brian Paradza is an investment enthusiast who received the CFA Charter in 2019. A strong believer in long-term, fundamental-based investing, Brian learns from gurus like Warren Buffett, but recognizes the human behavioral tendencies that lead to “ madness” in the short term. You may find him curious as he examines tech investment opportunities, cannabis, blockchains, and the new asset class of cryptocurrencies.

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