Artificial intelligence seems to be a hot technological trend that should keep us supplied with plenty of new developments in the future. Can machines be programmed to think and act like humans? If your answer is yes, then C3.ai (NYSE:AI), a provider of enterprise artificial intelligence (AI) software for digital transformation, may look tempting. But I’d argue you should avoid AI stock right now, no matter how exciting its tech sounds.
I do not like AI stock, and I think after you read my arguments, you might think twice about buying it too.
Starting at the core of my arguments is a very ugly chart. AI stock has a one-year performance as of March 23, 2022, of nearly -64% and a current stock price under $24. Since its initial public offering in December 2020, C3.ai has lost almost half of its value.
AI Stock Has been in Long-Term Collapse
As a reminder, artificial intelligence software company C3.ai back in December 2020 had priced its initial public offering at $42 a share. On its trading debut, the stock surged to more than $100, representing at one time gains of more than double the IPO price.
Buying shares at $42 per share and holding them until today, giving you a loss of nearly 45%, is obviously a bad idea. If you look at the one-year chart of AI stock, you will notice a peak near $69 and then a constant decline with some short-lived rallies. Those rallies show that 2021 was great for the U.S. stock market, as we had low geopolitical risks and the Federal Reserve hadn’t yet taken action to tighten its monetary policy. The tide at least tried to lift all boats.
But despite all that, AI stock was very weak and under constant selling pressure. Could AI have predicted this happening? It is not a philosophical question (though perhaps some advanced trading software based on AI may have a clue that this was going to befall the stock), but what about the AI platform of C3.ai itself?
Year-to-date Ai stock has losses of nearly 24%, so the selling pressure clearly continues. Maybe C3.ai should create an AI program that can predict when its stock will turn things around.
C3.ai Q3 2022 Earnings Report Has Unsolved Problems
Fiscal third-quarter 2022 financial highlights included a year-over-year revenue increase of 42%, to $69.8 million. It also saw a 34% increase of subscription revenue, a better GAAP gross profit of $52.4 million (versus $36.9 million a year ago) and upbeat revenue guidance for fiscal 2022 of $252 million. That’s a 38% increase over the prior year.
There are two main unsolved problems. First C3.ai is losing money. And on top of that, it is losing more money now than a year ago. GAAP net loss per share was -38 cents, compared to -21 cents one year ago.
And the second problem is a cash burn problem.
C3.ai reported in the latest quarter free cash flow of -$55.09 million and revenue of $69.8 million. If you do the math, you will note that nearly 78% of the revenue was cash used, or under another context, cash that the company cannot invest or distribute to shareholders.
Finally, there is another reason to worry a lot about AI stock now.
AI Stock Must Improve Its Operating Margin
The artificial intelligence firm has an operating margin of -70.26% for the trailing 12 months.
Without fixing this operating margin soon, the profitability seems to be a riddle that AI technology may not be able to solve. I see a company with a problem controlling its operating expenses. These expenses must come down or gross income must go up as much as possible. The gross margin for the latest quarter of 75% is already very high so it may not get any better.
C3.ai is a firm with promising technology, but this is not enough to bring great financial results yet. It remains a stock to avoid until it solves these issues.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.