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Down 64% in this bear market, can C3.ai recover in 2023?

What happened

Actions of C3.ai (AI 0.36%) fell nearly 65% ​​in 2022, as the company’s revenue growth rate slowed dramatically and investors fled highly valued tech stocks. The investment narrative around C3.ai focused on the enormous potential of its disruptive technology. Over the past year, it has become clear that investors have been expecting too much from stocks, at least in the short term.

So what

A year ago, C3.ai reported revenue growth of 41% for the fiscal quarter that ended in October 2021. In the most recent quarter, that rate fell all the way to 7%. That’s not high enough to satisfy growth investors, and it’s not high enough to support aggressive valuation ratios.

C3.ai also reported a significant increase in its cash burn rate, which creates additional risk for shareholders. The weak financial results caused Wall Street analysts to comment negatively, questioning the opportunity.

An engineer who uses artificial intelligence and virtual reality tools to help design.

Image source: Getty Images.

Disappointing financial results were exacerbated by difficult stock market conditions. Rising interest rates and fears of global economic weakness are driving major market indexes lower, with growth stocks taking the brunt of the brunt. The Nasdaq, which is heavily exposed to the technology sector, is down 33% in 2022.

Investors were forced to revise their near-term forecasts for the C3 downward, but it also became cheaper relative to its underlying fundamentals. The stock’s price-to-sales ratio fell from close to 15 to 4.4 during the year.

Table of AI PS ratio

AI PS ratio data by ICharts

Investors’ appetite for risk has changed dramatically, while the perceived risk and reward for C3.ai has worsened. That’s a tough combination for shareholders.

Now what

C3.ai has established a strong team, which has gathered exceptional talent in product development and engineering. However, the company struggled with some aspects of sales and gaining market traction. Over the course of a year, the company reorganized its underperforming sales force, addressed the length of its sales cycle, and completely transformed its revenue model.

Last quarter, C3 made a major transition from a software-as-a-service (SaaS) model to a consumption-based model. This will create some uncertainty in the short term and make it difficult for investors to analyze his progress.

No wonder C3.ai is currently experiencing a rough patch. He is navigating some major strategic shifts as he faces the slowdown in growth that is almost universal at enterprise technology companies. AI-as-a-service is a compelling emerging industry, especially as digital automation becomes more commonplace in every industry. C3 is likely to remain the leader in the space due to its early mover status and product quality. There are still many possibilities in this action.

Nonetheless, the challenges are clear: the global economy does not currently support the high growth of most enterprise software companies. High interest rates lead to low stock valuation ratios. C3.ai is dealing with some internal challenges and faces stiff competition from some high-profile peers.

None of these factors are likely to be resolved in the short term, so investors shouldn’t expect C3.ai to erase its losses within a year. However, the stock could still be a shrewd long-term buy now that it is more reasonably priced.

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