Wall Street Analysts Are Bullish on This Artificial Intelligence (AI) Stock. Here's Why I'm Not

C3.ai (AI 0.51%) has been a tough stock to own over the past four years. The developer of artificial intelligence (AI) algorithms went public at $42 in December 2020, and its stock more than quadrupled to an all-time high of $177.47 just two weeks later. That rally was amplified by a social media-driven buying frenzy in growth and meme stocks.

But today, C3.ai trades at about $25. The AI stock lost its luster as its growth cooled off, it racked up more losses, and rising interest rates popped its bubbly valuations. Yet many Wall Street analysts are still bullish on this beaten-down stock.

Out of the eight analysts who cover C3.ai, three rate it as a “strong buy” or a “buy,” four rate it as a “hold,” and only one rates it as a “sell.” Their current price targets range from $15 to $40, with an average price target of $29.16.

C3.ai’s stock would need to rise 16% to reach that average price target and rally nearly 60% to hit that top price target. That’s an optimistic outlook, but I’m still adamantly bearish on C3.ai for four simple reasons.

1. Questionable technological advantages

C3.ai was previously known as C3 Energy and C3 IoT (Internet of Things) prior to its latest rebranding as an “AI company.” However, each version of C3 developed the same machine learning algorithms which could be plugged into an organization’s existing software to optimize, accelerate, and automate certain tasks.

Each of C3’s rebrandings coincided with a temporary spike in interest in each market. The energy market burned brightly when crude oil’s prices hit record highs in 2008. The IoT market gained a lot of attention about a decade ago as companies installed wireless chips across a wide range of devices, and the AI market has been gaining momentum over the past few years as more companies launch generative AI applications.

The critics argue that C3 is merely repackaging its old machine learning software as “AI algorithms” to capitalize on the spending frenzy in AI technologies. So while C3 is technically selling AI software, it might lack any competitive advantages against data mining players like Palantir, automation software providers like UiPath, and cloud giants like Microsoft.

2. Severe customer concentration issues

C3.ai generates about 30% of its revenue from a joint venture with the energy giant Baker Hughes (NASDAQ: BKR). Baker Hughes has repeatedly negotiated lower minimum revenue contributions to that JV over the past few years, and there’s no guarantee it will renew that deal when it expires in fiscal 2025 (which ends in April 2025).

Baker Hughes also invested in Augury, a developer of AI algorithms for diagnosing problems in industrial machinery, in 2021. That investment suggests it’s spreading out its bets across the AI sector and might step away from C3.ai.

3. Four CFOs in as many years

C3.ai has repeatedly changed the way it counts its number of customers since its IPO, and it abruptly pivoted from a subscription-based model toward a consumption-based model in fiscal 2023. In the first quarter of fiscal 2024, it abandoned its original goal of achieving a non-GAAP (generally accepted accounting principles) profit for the full year in favor of ramping up its generative AI investments. It also often struggled to meet its own revenue expectations over the past four years.

Those issues aren’t too surprising when we consider that C3.ai is now on its fourth chief financial officer in as many years. David Barter became C3’s CFO in 2020 as it geared up for its IPO, but he stepped down in 2021. Barter’s successor, Adeel Manzoor, lasted just three months before abruptly stepping down in February 2022. Juho Parkkinen then held the CFO position for the following two years, but he resigned this March and handed the reins to its current CFO, Hitesh Lath. That high turnover rate suggests that C3’s ongoing accounting and strategic shifts might be masking some other serious issues.

4. It hasn’t proven its business model is sustainable

The bulls believe C3 can renew its deal with Baker Hughes, roll out more algorithms for the generative AI market, widen its moat, and continue locking in large customers across the industrial, energy, and government sectors. They’ll also point out that its stock still looks reasonably valued at 8 times this year’s sales.

But even if C3 achieves all of those things, analysts still expect its revenue growth to decelerate over the next three years as it barely narrows its net losses. In other words, it hasn’t proven that its business model is sustainable yet.

Data source: Marketscreener.

C3’s stock isn’t headed off a cliff yet, but there aren’t any compelling reasons to buy this flawed AI play when other AI companies have more irons in the fire. That’s why investors should avoid C3 and ignore Wall Street’s rosy expectations.