Over the past six months, C3.ai has been a great trade, beating the S&P 500 by 5.7%. Its stock price has climbed to $9.78, representing a healthy 16.4% increase. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in C3.ai, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think C3.ai Will Underperform?
We’re happy investors have made money, but we don’t have much confidence in C3.ai. Here are three reasons why there are better opportunities than AI, plus one stock we’d rather own.
1. Declining Billings Reflect Product and Sales Weakness
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
C3.ai’s billings came in at $48.03 million in Q1, and it averaged 33.8% year-on-year declines over the last four quarters. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation. 
2. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
C3.ai’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between C3.ai’s products and its peers.
3. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
C3.ai’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 76.8%, meaning it lit $76.77 of cash on fire for every $100 in revenue.
Final Judgment
C3.ai doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 6.6× forward price-to-sales (or $9.78 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward one of our top digital advertising picks.
Stocks We Would Buy Instead of C3.ai
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