Shareholders of C3.ai would probably like to forget the past six months even happened. The stock dropped 30.6% and now trades at $23.25. This 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 Is C3.ai Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why AI doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, C3.ai grew its sales at a 15.5% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds. 
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.
It’s very expensive for C3.ai to acquire new customers as its CAC payback period checked in at 159.6 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.
3. Operating Losses Sound the Alarms
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
C3.ai’s expensive cost structure has contributed to an average operating margin of negative 83.4% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if C3.ai reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.
Final Judgment
C3.ai’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 6.7× forward price-to-sales (or $23.25 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at the Amazon and PayPal of Latin America.
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