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On July 20, 2024
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1 Red Flag C3.ai Stock Investors Must Know
C3.ai (NYSE: AI) has become a fairly popular stock due to the artificial intelligence (AI) investing trend. Because it's one of the few companies that is nearly a pure-play investment in AI, many investors have taken a look at it. However, if you're considering investing in C3.ai, I'd urge you to consider this one red flag, as it could save you from heartache in the future. C3.ai's growth is strong and is picking up speed Although growth investors love to see revenue increase, all companies need to be able to turn a profit and return value to shareholders. When a company is still rapidly expanding, investors are willing to look past unprofitability because they know a day will come when profits eventually occur. C3.ai falls into this camp, as it has posted solid growth for multiple quarters. In its fourth quarter of fiscal year 2024 (ended April 30), its total revenue rose 20% year over year, and it gave guidance for revenue to grow 23% in fiscal year 2025. However, my red flag lies a few rows down on the operating statement: C3.ai's spending is out of control. C3.ai's profits are nowhere in sight After subtracting the cost of revenue, C3.ai had a gross profit of $51.6 million. So, if C3.ai were to break even, its expenses had to be less than this figure. Unfortunately, they weren't even close. In Q4, C3.ai had operating expenses of $134 million. That equates to a loss from operations of $82.3 million. With revenue of $86.6 million in Q4, C3.ai spent nearly double its revenue. No financial advisor in the country would tell you to spend double what you make in a year, but that's what C3.ai is doing. To fuel this spending, C3.ai is burning its cash on hand and compensating its employees with stock. Stock-based compensation is a noncash expense because C3.ai can create this currency essentially out of thin air. In Q4, C3.ai's stock-based compensation expenses totaled $56.7 million, or 66% of revenue. That's a massive amount and hurts shareholders, who essentially end up footing the bill for some of C3.ai's employee compensation. When a company continuously issues shares, it dilutes existing shareholders. This mechanism is similar to how inflation works if the issuing government continuously prints new money. You can see this effect with C3.ai's share count. Anyone who bought shares in the 2020 IPO now controls much less of the company than they once did because C3.ai has flooded the market with additional shares. AI Shares Outstanding data by YCharts It will take many years for C3.ai to dig out of this hole. If the company didn't change any of its expenses, its revenue would need to increase by $82.3 million to break even. At C3.ai's current projected 23% growth rate, it would take over three years to reach that point. I doubt C3.ai's expenses would stay stagnant over that time, and that calculation also assumes its gross profit would increase at a similar speed, which isn't realistic. If you factor in C3.ai's 60% gross profit margin, then C3.ai would need $223 million in quarterly revenue to break even. That's four and a half years of growth at a 23% pace, which is a long time to wait. So, if you're considering investing in C3.ai, you must understand that the company is deeply unprofitable and will take years to break even. I'm not OK with that risky financial strategy, which is why I'm passing on C3.ai stock. The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and C3.ai wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $741,989!* Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. Keithen Drury has no position in any of the stocks mentioned. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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1 Red Flag C3.ai Stock Investors Must Know | The Motley Fool
C3.ai is deeply unprofitable and will take years to emerge from that hole. C3.ai (AI -1.45%) has become a fairly popular stock due to the artificial intelligence (AI) investing trend. Because it's one of the few companies that is nearly a pure-play investment in AI, many investors have taken a look at it. However, if you're considering investing in C3.ai, I'd urge you to consider this one red flag, as it could save you from heartache in the future. Although growth investors love to see revenue increase, all companies need to be able to turn a profit and return value to shareholders. When a company is still rapidly expanding, investors are willing to look past unprofitability because they know a day will come when profits eventually occur. C3.ai falls into this camp, as it has posted solid growth for multiple quarters. In its fourth quarter of fiscal year 2024 (ended April 30), its total revenue rose 20% year over year, and it gave guidance for revenue to grow 23% in fiscal year 2025. However, my red flag lies a few rows down on the operating statement: C3.ai's spending is out of control. After subtracting the cost of revenue, C3.ai had a gross profit of $51.6 million. So, if C3.ai were to break even, its expenses had to be less than this figure. Unfortunately, they weren't even close. In Q4, C3.ai had operating expenses of $134 million. That equates to a loss from operations of $82.3 million. With revenue of $86.6 million in Q4, C3.ai spent nearly double its revenue. No financial advisor in the country would tell you to spend double what you make in a year, but that's what C3.ai is doing. To fuel this spending, C3.ai is burning its cash on hand and compensating its employees with stock. Stock-based compensation is a noncash expense because C3.ai can create this currency essentially out of thin air. In Q4, C3.ai's stock-based compensation expenses totaled $56.7 million, or 66% of revenue. That's a massive amount and hurts shareholders, who essentially end up footing the bill for some of C3.ai's employee compensation. When a company continuously issues shares, it dilutes existing shareholders. This mechanism is similar to how inflation works if the issuing government continuously prints new money. You can see this effect with C3.ai's share count. Anyone who bought shares in the 2020 IPO now controls much less of the company than they once did because C3.ai has flooded the market with additional shares. It will take many years for C3.ai to dig out of this hole. If the company didn't change any of its expenses, its revenue would need to increase by $82.3 million to break even. At C3.ai's current projected 23% growth rate, it would take over three years to reach that point. I doubt C3.ai's expenses would stay stagnant over that time, and that calculation also assumes its gross profit would increase at a similar speed, which isn't realistic. If you factor in C3.ai's 60% gross profit margin, then C3.ai would need $223 million in quarterly revenue to break even. That's four and a half years of growth at a 23% pace, which is a long time to wait. So, if you're considering investing in C3.ai, you must understand that the company is deeply unprofitable and will take years to break even. I'm not OK with that risky financial strategy, which is why I'm passing on C3.ai stock.
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C3.ai, an artificial intelligence software company, faces scrutiny over its revenue recognition practices, raising concerns for investors.
C3.ai (NYSE: AI), a company specializing in enterprise AI software, has been riding the wave of artificial intelligence hype in recent months. The company's stock price has seen significant volatility, driven by investor enthusiasm for AI-related businesses 1. As of July 2023, C3.ai's shares were up over 170% year-to-date, reflecting the broader market excitement surrounding AI technologies 2.
Despite the company's apparent growth, a closer look at C3.ai's financial practices has raised some red flags for investors. The primary concern revolves around the company's revenue recognition methods, which have come under scrutiny [1]. C3.ai has been using a subscription accounting model that allows it to recognize revenue from multi-year contracts upfront, potentially inflating its reported revenue figures [2].
C3.ai's subscription accounting model works as follows:
This approach can lead to a front-loading of revenue, which may not accurately reflect the company's ongoing business performance or cash flow [2].
The use of this accounting method has several implications for investors:
Inflated Growth Perception: The front-loading of revenue can create an illusion of rapid growth, which may not be sustainable in the long term [1].
Cash Flow Discrepancies: While reported revenue may be high, actual cash inflows may be significantly lower, potentially leading to cash flow issues [2].
Future Revenue Concerns: As more revenue is recognized upfront, there may be less revenue to recognize in future periods, potentially leading to slower growth or even revenue declines [1].
C3.ai's management has defended its accounting practices, stating that they comply with generally accepted accounting principles (GAAP) [2]. However, the company has also announced plans to transition to a consumption-based pricing model, which could potentially address some of the concerns raised about its current revenue recognition methods [1].
The market's reaction to these concerns has been mixed. While some investors remain bullish on C3.ai's long-term potential in the AI market, others have expressed skepticism about the company's financial reporting [2]. Analysts have urged investors to look beyond the reported revenue figures and consider other financial metrics, such as cash flow and customer retention rates, when evaluating C3.ai's performance [1].
C3.ai's situation highlights the broader challenges facing investors in the rapidly evolving AI sector. As enthusiasm for AI technologies continues to grow, it becomes increasingly important for investors to scrutinize the financial practices and underlying business models of companies operating in this space [2].
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C3.ai, a prominent artificial intelligence company, has seen its stock price drop significantly. This article examines the reasons behind the decline and evaluates whether it presents a buying opportunity for investors.
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C3.ai reports strong Q1 earnings with revenue and EPS beats, but faces stock decline due to concerns over profitability and a cautious outlook. The company's focus on AI diversification and federal contracts shows promise amid market volatility.
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C3.AI, an enterprise AI software provider, has seen significant stock price fluctuations. This article examines whether it's still a good time to invest in C3.AI, considering its recent performance and future prospects.
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C3.ai's stock price plummets following Q2 earnings report, despite beating revenue expectations. Analysts debate the company's future prospects amid strong AI demand and margin pressures.
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C3.ai, an enterprise AI software provider, experienced a significant stock drop following its Q1 fiscal 2024 earnings report. Despite beating earnings expectations, the company faced analyst scrutiny and price target cuts.
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