Artificial intelligence-focused software company C3.ai, Inc. (AI) offers software-as-a-service applications for enterprises. The Redwood City, Calif.-based concern recently announced a new five-year Production-Other Transaction Agreement with the U.S. Department of Defense (DoD). “We are thrilled to have been selected for these important initiatives and look forward to expanding our work and finding new ways to better serve the U.S. federal government,” said Thomas M. Siebel, CEO of C3 AI. Furthermore, in its most recent quarter, AI also diversified its enterprise AI production footprint across several industries and continued to innovate with C3 AI Data Vision delivery.

However, shares of AI have declined 74.1% in price over the past year and 75.8% year-to-date. Over the past month, the stock has slumped 27% to close yesterday’s trading session at $32.35. In November, a large insider sale amid other factors helped trigger the broader sell-off. CEO Thomas Siebel sold 615,488 shares at prices ranging from $46.96 to $51.20, with his total transaction amounting to $29,762,880.

Despite beating consensus estimates in its last reported quarter and raising its guidance, the stock sold off 17% on the release. And the company’s bottom line remains bleak. Its non-GAAP net loss per share came in at $0.23, versus analysts’ expectations of $0.28. The stock hit its 52-week low of $27.52 on December 2 after the company posted its  earnings report. Following that, Bank of America downgraded the company to Underperform, citing disappointing subscription revenues and a sequential decline in Remaining Performance Obligations. Wedbush lowered its price target to $45 from $70, while J.P. Morgan analyst Mark Murphy slashed his target price to $43 from $53, keeping an Underweight rating. According to some U.S. software analysts, the company’s losses could widen further, and it might take some time for the company to hit its breakeven point and improve margins.

Click here to check out our Software Industry Report for 2021

Here is what could shape AI’s performance in the near term:

Poor Profitability

AI’s EBITDA margin and net income margin of negative 61.32% and 63.71%, respectively, are  substantially lower than the 14.42% and 6.40% industry averages. And AI’s  negative 32.95%, 11.60%, and 13.30% respective ROE, ROA, and ROTC compare with the 8.29%, 3.62%, and 4.97% industry averages.

Stretched Valuation

In terms of forward EV/Sales, AI is currently trading at 9.90x, which is 139.6% higher than the 4.13x industry average. Also, its 14.19 forward Price/Sales ratio is 244% higher than the 4.12 industry average.

Top Line Growth Does Not Translate into Bottom-Line Improvement

AI’s total revenues increased 40.9% year-over-year to $58.26 million in its fiscal second quarter, ended October 31. However, its loss from operations stood at $55.68 million, up 283.3% from the same period last year. And its non-GAAP net loss grew 142.4% from its  year-ago value to $23.62 million.

The company’s non-GAAP net loss per share was $0.23, compared to its $0.26 year-ago value. Analysts expect its EPS to remain negative until the next year. Furthermore, the company’s EPS is expected to decline 107.7% in the current quarter, 20.8% in the next quarter, and 177.1% in the current year. And  its EPS is expected to decline 32.9% per annum over the next five years.

POWR Ratings Reflect This Bleak Prospects

AI has an overall F rating, which translates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Quality, consistent with its lower-than-industry profit margins.

AI has a D grade for Value. Its stretched valuations justify this grade.

Of the 75 stocks in the D-rated  Technology – Services industry, AI is ranked #74.

Beyond what I have stated above, you can also view AI’s grades for Sentiment, Growth, Momentum, and Stability here.

View the top-rated stocks in the Technology – Services industry here.

Bottom Line

AI is a growing artificial intelligence-based company, effectively expanding its customer base and diversifying its enterprise AI footprint. However, the company’s profit margins are lying low. In addition, analysts expect its EPS to decline in the coming quarters. The stock has a 1.65 beta, indicating high volatility. Also, considering its lofty valuation, we think the stock is best avoided now.

How Does C3.ai, Inc. (AI) Stack Up Against its Peers?

While AI has an overall POWR Rating of F, one might want to consider investing in the following Technology – Services stocks with an A (Strong Buy) rating: Celestica, Inc. (CLS) and NetScout Systems Inc. (NTCT).

AI shares fell $0.35 (-1.08%) in premarket trading Tuesday. Year-to-date, AI has declined -76.68%, versus a 26.01% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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