Over the last six months, C3.ai’s shares have sunk to $17.27, producing a disappointing 19.4% loss - a stark contrast to the S&P 500’s 18.8% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in C3.ai, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think C3.ai Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons we avoid AI and a stock we'd rather own.
1. Weak Billings Point to Soft Demand
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 $63.63 million in Q2, and over the last four quarters, its year-on-year growth averaged 12.4%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Low Gross Margin Reveals Weak Structural Profitability
For software companies like C3.ai, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
C3.ai’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 56.6% gross margin over the last year. That means C3.ai paid its providers a lot of money ($43.37 for every $100 in revenue) to run its business.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. C3.ai has seen gross margins decline by 6.9 percentage points over the last 2 year, which is among the worst in the software space.
3. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
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 23.1%, meaning it lit $23.07 of cash on fire for every $100 in revenue.
Final Judgment
C3.ai falls short of our quality standards. Following the recent decline, the stock trades at 7.6× forward price-to-sales (or $17.27 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward an all-weather company that owns household favorite Taco Bell.
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