C3.ai, Inc.’s (AI) shares have plummeted since its peak in June this year, primarily due to apprehensions surrounding the company's valuation and growth potential in the evolving AI landscape. Shares of AI have plunged 23.7% over the past month to close its last trading session at $31.22.

The company, set to release its fiscal 2024 first quarter (ended July 31) this week, has faced a continuous stream of annual losses, with a cumulative loss surpassing $269 million over the past four quarters. This financial situation is prompting concerns regarding the perceived overvaluation of the company, especially since the artificial intelligence hype seems to be fading.

Also, one of AI's major shareholders, Baker Hughes Company (BKR), recently reduced its stake in the company. Additionally, a shareholder has filed a derivative lawsuit against AI, alleging that the company misled investors about its financial health before its initial public offering.

AI and its management are also facing scrutiny for failing to meet product deadlines.

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

Weak Financials

During the fiscal 2023 fourth quarter that ended April 30, AI’s gross profit decreased 13.6% year-over-year to $47.50 million. Its loss from operations worsened 29.6% from the year-ago value to $73.28 million. In addition, the company’s net loss and loss per share increased 11.2% and 5.5% year-over-year to $64.96 million and $0.58.

Unfavorable Analyst Estimates

Analysts expect AI’s loss per share to come in at $0.17 for the fiscal 2024 first quarter that ended July 2023. Moreover, the company’s loss per share for the ongoing quarter (ending October 2023) is expected to stand at $0.12. In addition, AI’s loss per share for the fiscal year ending April 2024 is expected to come in at $0.30.

Low Profitability

AI’s trailing-12-month EBITDA margin of negative 107.01% compares to the industry average of 9.04%. Furthermore, the stock’s trailing-12-month ROCE and ROTC of negative 28.02% and 18.25% compare to the respective industry averages of 0.62% and 2.37%.

High Valuation

In terms of forward EV/Sales, AI is trading at 9.52x, 234.7% higher than the industry average of 2.84x. Its forward Price/Sales of 12.05x compares with the 2.74x industry average. Moreover, AI’s forward Price/Book of 4.17x is 2.2% higher than the 4.09x industry average.

POWR Ratings Reflect Bleak Prospects

AI’s poor fundamentals are reflected in its POWR Ratings. The stock has an overall rating of F, which equates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AI has an F grade for Quality, justified by its lower-than-industry profitability. Also, the stock has a D for Stability, consistent with its 24-month beta of 2.67.

AI is ranked #23 in the 24-stock Software - SAAS industry. Click here to access AI’s Growth, Value, Momentum, and Sentiment ratings.

Bottom Line

The company's continuous annual losses in the last four quarters raise overvaluation concerns. Furthermore, BKR reduced its stake in AI, and a shareholder filing a derivative lawsuit accusing AI of misleading investors before its IPO, while product deadline misses are also attracting scrutiny.

Considering the company’s poor financials, low profitability, high valuation, and unfavorable analyst outlook, it seems wise to steer clear of AI before its earnings release.

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

While AI has an overall grade of F, equating to a Strong Sell rating, you may also check out these other stocks within the Software - SAAS industry: New Relic, Inc. (NEWR), Vimeo, Inc. (VMEO) and MiX Telematics Limited (MIXT) with an A (Strong Buy) and B (Buy) ratings. For exploring more A and B-rated Software - SAAS stocks, click here.

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AI shares were trading at $30.84 per share on Tuesday afternoon, down $0.38 (-1.22%). Year-to-date, AI has gained 175.60%, versus a 18.66% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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