C3.ai (NYSE: AI) has benefited significantly from the excitement surrounding artificial intelligence (AI). It provides companies in a wide range of industries with turnkey AI solutions, making it easy for them to deploy next-gen technologies.
But despite the promising path ahead for the business with respect to AI, it has been anything but a smooth ride for the stock, which is down big this year. And while the business has been growing, there are plenty of risks involved with investing in it today.
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C3.ai recently posted its fiscal third-quarter earnings, and there are three numbers from that report you should pay close attention to and consider before you decide to invest in the stock.
1. Its sales growth rate slowed to 26%
For the three-month period ending Jan. 31, C3.ai’s sales rose by 26% to $98.8 million. While that’s a strong rate of growth, it marks a slowdown from the previous period. This is important because the big allure of investing in C3.ai is for its promising growth prospects, specifically due to AI.
AI Operating Revenue (Quarterly YoY Growth) data by YCharts
This isn’t a massive slowdown, but there are concerns that AI-related spending may slow in the near future. Fears about overspending on AI rose earlier this year when Chinese company DeepSeek unveiled an AI chatbot that was comparable to other ones available on the market, including ChatGPT, despite supposedly costing much less to develop.
If companies scale back on AI investments, that could be bad news for C3.ai as its growth rate may continue to slow, and that would make the stock a less appealing investment.
2. Its operating loss worsened, to $87.6 million
C3.ai isn’t profitable yet and there’s little reason to expect that it will be anytime soon — hence the importance of its growth rate being strong. That would at least give investors a reason to justify the high expenditures. Last quarter, its operating loss totaled $87.6 million, up from a loss of $82.5 million in the prior-year period.
Previously, C3.ai CEO Tom Siebel said it was a “mathematical certainty” the company would move toward profitability with scale, but that isn’t happening. And this is something investors shouldn’t overlook. If C3.ai has difficulty in getting into the black, question marks will remain about just how viable and sustainable the business is. Without a path to profitability, it may be difficult to see this as a good company to invest in.
3. The company burned through $52.7 million for operating activities in the past nine months
A company that’s not generating positive cash flow will inevitably need to raise funds to grow its operations, and that is usually the result of issuing stock, which dilutes shareholders and which can cause the share price to plummet.
Over the past nine months, C3.ai’s operating activities resulted in an outflow of $52.7 million, which is an improvement from the $83.7 million it burned through over the same time frame in the previous year. However, it still puts the business nowhere near having cash-flow-positive operations.
And this is even as it is spending more on stock-based compensation, which tech companies often use to save cash by compensating workers with stock instead. Stock-based compensation has totaled $174.4 million over the past nine months, up from $159 million a year ago.
But even as it’s paying more expenses with stock-based compensation, C3.ai is still burning through tens of millions of dollars just from its day-to-day operations, which doesn’t yet factor in capital expenditures.
C3.ai stock is struggling this year and more losses could be coming
Year to date, shares of C3.ai have fallen by more than 35%. Investors don’t appear to be buying the hype anymore and without significant progress on the company’s bottom line and with respect to cash flow, the stock’s decline may continue.
While growing sales is great, investors also need to see that a company’s operations are viable over the long term, and C3.ai still hasn’t proven that its business can sustain itself given its ongoing losses and cash burn. Until that changes, you may be better off passing on this volatile AI stock.
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David Jagielski 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.
