Prediction: Buying This AI Stock Will Not Look Smart in 5 Years

Yahoo

20 hours ago

C3.ai is growing its revenue at a decent rate, but it's not scaling its business with any efficiency.
It is growing slower than its AI peers and is posting huge operating losses.
The stock trades at an expensive valuation.
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Just about every stock with some connection to artificial intelligence (AI) has seen its price soar in the past couple of years. Ever stock, that is, except C3.ai (NYSE: AI), that is. The AI-focused company with the ticker "AI" is trading down around 22% over the past year and around 86% from all-time highs as the company struggles to grow and get anywhere close to generating a profit.
This AI company has a lot of hype around it, and even brags about huge wins with partnerships with other AI players. A lot of this is all bark and no bite.
Here's why investors will be disappointed with the results of C3.ai stock compared to other AI-associated investments over the next five years.
C3.ai has been a trendy name in the AI space for years. The company brands itself as the AI enterprise software company, deploying software solutions including its new agentic AI platform and generative AI tools. It has large customers, including energy giants and the U.S. Air Force, implementing its software in operations.
This all sounds fine and dandy, but it oversells C3.ai as a company with actual software products. Similar to a consultant, C3.ai has a large sales team that wins contracts to build custom software solutions for companies, which is different than a software provider that builds once and ships as many times as it can, such as Microsoft. It is a much more difficult business model, and one that is harder to scale with large profit margins. C3.ai generated only $389 million in revenue over the last 12 months, even though the AI sector is in the middle of one of the largest spending booms ever.
Compare that to its quasi-competitor, Palantir Technologies. The company generated $3.11 billion in revenue over the last 12 months and is growing revenue much faster than C3.ai. Last quarter, C3.ai's revenue grew 26% year over year compared to 39% for Palantir.
One could argue, looking at the metrics referenced above, that C3.ai is in fine shape as a business. It is growing revenue at over 20% year over year and has long-term software consultant contracts with big enterprises. But those strong top-line metrics aren't making it down to the company's bottom-line profit and loss metrics, which keep moving in the wrong direction. This is an indicator that the company has a bloated expense structure and will struggle to scale due to the custom-built software it deploys.
Last fiscal year, C3.ai had an operating loss of $324 million on $389 million in revenue. It spent $231 million on stock-based compensation -- a noncash dilutive expense -- which is around 60% of its overall revenue. This is an unsustainable figure and needs to be dramatically reduced in order for C3.ai to generate a profit. Spending 10% of revenue on stock-based compensation can be a concern for investors when analyzing a stock, but 60% is unheard of.
It is no surprise then why C3.ai stock is down. It has to spend a boatload every year to retain its research, sales, and operational staff that deploy these consultant contracts with large enterprises, and these costs are simply outweighing any revenue earned by these contracts, making C3.ai persistently unprofitable.
Two main reasons stand out to me as to why C3.ai stock will struggle to generate a positive return for shareholders over the next five years. First, the services it provides do not look scalable due to the custom-build process and heavy losses it is sustaining. In fact, it looks like the company has the opposite of operating leverage, as its operating loss has gotten worse and worse since going public around five years ago, even though revenue is growing.
Second, C3.ai stock trades at a high valuation. It has a price-to-sales (P/S) ratio of 8.5, which is much higher than the S&P 500 average. This is for a company with deeply negative operating margins and no history of profitability. Yes, revenue is growing at a decent clip, but the company is showing zero signs of operating leverage. In fact, one might argue that growing revenue is a bad thing for C3.ai, as historically, all growing revenue has done is lead to larger operating losses.
A high valuation, huge losses, and slower revenue growth than its AI peers make C3.ai a bad stock to own right now. Avoid buying it for your portfolio despite the AI hype in the markets today.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Palantir Technologies. The Motley Fool recommends C3.ai and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Prediction: Buying This AI Stock Will Not Look Smart in 5 Years was originally published by The Motley Fool