The C3.ai Stock Debate: Overpriced or Underestimated?

$C3.ai (AI.US)$ stock has been a tale of two valuations over the last year. Before artificial intelligence became the latest fad due to the public’s fascination with ChatGPT, the valuation of AI stock was quite attractive. For example, on Dec. 1, 2022, the shares were changing hands for roughly 3.9 times analysts’ current average 2024 revenue estimate. That’s a somewhat high valuation, but it was attractive, given the company’s strong prospects and fairly rapid growth.

But now the shares are trading for eight times analysts’ mean 2024 sales estimate. That’s a very extended valuation, particularly in today’s high-interest rate environment when many investors are likely to run for the hills if the company stumbles even a little bit or if the Street’s fascination with AI eases just a tad.
So although I’m very upbeat about AI’s longer-term outlook and I still think that the company could eventually become the $Microsoft (MSFT.US)$ of AI, I believe that investors should sell the shares, as they’ll probably get the opportunity to buy them back at much lower prices in the future.

Many, if not most, companies are now looking to incorporate AI amid new appreciation for its power, but few will want to spend the money to employ AI experts full-time. As a result, many firms should be eager to use C3.AI’s offerings.
What’s more, the many companies within the sectors for which AI has developed specialized applications should be especially eager to use its offerings. That’s because those firms should find the sector-specific data and features that C3.ai has loaded into the applications extremely useful.
Given those points, it’s not surprising that C3.ai has recruited many impressive customers, including oil exploration giants $Shell (SHEL.US)$ and $Baker Hughes (BKR.US)$ , the gigantic insurer, Liberty Mutual, the European energy giant, $ENGIE SPON ADR EACH REPR 1 SHARE (ENGIY.US)$ , and a huge accounting firm, EY.
On the growth front, C3.ai’s backlog rose 7% in its last reported quarter versus the previous reported quarter. Its top line increased to $194.4 million in the nine months that ended in January from $180.4 million during the same period a year earlier.