Wall Avenue Analysts Are Bullish on This Synthetic Intelligence (AI) Inventory. Here is Why I am Not

C3.ai (AI 0.51%) has been a troublesome inventory to personal over the previous 4 years. The developer of synthetic intelligence (AI) algorithms went public at $42 in December 2020, and its inventory greater than quadrupled to an all-time excessive of $177.47 simply two weeks later. That rally was amplified by a social media-driven shopping for frenzy in progress and meme shares.

However immediately, C3.ai trades at about $25. The AI inventory misplaced its luster as its progress cooled off, it racked up extra losses, and rising rates of interest popped its bubbly valuations. But many Wall Avenue analysts are nonetheless bullish on this beaten-down inventory.

Picture supply: Getty Photographs.

Out of the eight analysts who cowl C3.ai, three charge it as a “sturdy purchase” or a “purchase,” 4 charge it as a “maintain,” and just one charges it as a “promote.” Their present worth targets vary from $15 to $40, with a mean worth goal of $29.16.

C3.ai’s inventory would wish to rise 16% to succeed in that common worth goal and rally practically 60% to hit that high worth goal. That is an optimistic outlook, however I am nonetheless adamantly bearish on C3.ai for 4 easy causes.

1. Questionable technological benefits

C3.ai was beforehand often known as C3 Power and C3 IoT (Web of Issues) previous to its newest rebranding as an “AI firm.” Nevertheless, every model of C3 developed the identical machine studying algorithms which might be plugged into a company’s current software program to optimize, speed up, and automate sure duties.

Every of C3’s rebrandings coincided with a short lived spike in curiosity in every market. The vitality market burned brightly when crude oil’s costs hit file highs in 2008. The IoT market gained numerous consideration a few decade in the past as firms put in wi-fi chips throughout a variety of units, and the AI market has been gaining momentum over the previous few years as extra firms launch generative AI functions.

The critics argue that C3 is merely repackaging its outdated machine studying software program as “AI algorithms” to capitalize on the spending frenzy in AI applied sciences. So whereas C3 is technically promoting AI software program, it’d lack any aggressive benefits in opposition to knowledge mining gamers like Palantir, automation software program suppliers like UiPath, and cloud giants like Microsoft.

2. Extreme buyer focus points

C3.ai generates about 30% of its income from a three way partnership with the vitality large Baker Hughes (NASDAQ: BKR). Baker Hughes has repeatedly negotiated decrease minimal income contributions to that JV over the previous few years, and there is no assure it’ll renew that deal when it expires in fiscal 2025 (which ends in April 2025).

Baker Hughes additionally invested in Augury, a developer of AI algorithms for diagnosing issues in industrial equipment, in 2021. That funding suggests it is spreading out its bets throughout the AI sector and would possibly step away from C3.ai.

3. 4 CFOs in as a few years

C3.ai has repeatedly modified the way in which it counts its variety of prospects since its IPO, and it abruptly pivoted from a subscription-based mannequin towards a consumption-based mannequin in fiscal 2023. Within the first quarter of fiscal 2024, it deserted its authentic objective of reaching a non-GAAP (usually accepted accounting ideas) revenue for the total yr in favor of ramping up its generative AI investments. It additionally usually struggled to fulfill its personal income expectations over the previous 4 years.

These points aren’t too shocking once we think about that C3.ai is now on its fourth chief monetary officer in as a few years. David Barter grew to become C3’s CFO in 2020 because it equipped for its IPO, however he stepped down in 2021. Barter’s successor, Adeel Manzoor, lasted simply three months earlier than abruptly stepping down in February 2022. Juho Parkkinen then held the CFO place for the next two years, however he resigned this March and handed the reins to its present CFO, Hitesh Lath. That top turnover charge means that C3’s ongoing accounting and strategic shifts is perhaps masking another critical points.

4. It hasn’t confirmed its enterprise mannequin is sustainable

The bulls imagine C3 can renew its take care of Baker Hughes, roll out extra algorithms for the generative AI market, widen its moat, and proceed locking in giant prospects throughout the economic, vitality, and authorities sectors. They will additionally level out that its inventory nonetheless appears moderately valued at 8 occasions this yr’s gross sales.

However even when C3 achieves all of these issues, analysts nonetheless anticipate its income progress to decelerate over the following three years because it barely narrows its internet losses. In different phrases, it hasn’t confirmed that its enterprise mannequin is sustainable but.

Information supply: Marketscreener.

C3’s inventory is not headed off a cliff but, however there are not any compelling causes to purchase this flawed AI play when different AI firms have extra irons within the hearth. That is why traders ought to keep away from C3 and ignore Wall Avenue’s rosy expectations.