Buyer beware: Morgan Stanley is bearish on this popular AI stock.

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Artificial intelligence (AI) stocks have been the darlings of the investment community for the better part of two years now. While semiconductor giant Nvidia ( NVDA ) has been the poster child for this revolutionary movement in technology, tech titans like Microsoft ( MSFT ), Amazon ( AMZN ) and Google ( GOOG ) have also spent billions to bolster their AI capabilities. . And why not? The market for AI is predicted to grow massively over the next decade, with almost every industry expected to feel the impact.

However, while the Nvidias, Amazons, and Microsofts of the world may be well established as the leading players in the AI ​​space, many smaller companies are also fighting for traction in a competitive industry – and some of them have “ AI” is also there. In his name to prove it. Here’s a closer look at one of those players, and why Morgan Stanley weighed in cautiously after earnings.

About C3.Ai Stock

Founded in 2009 by veteran. Silicon Valley entrepreneur Thomas Siebel, (AI) offers one Enterprise AI Platform which helps businesses leverage technologies. cloud computing, Big Data, and the Internet of Things (IoT) To gain insight and improve decision making. The company, which went public in 2020, currently has a market cap of $3.89 billion. stock Up 10.6% on a YTD basis, ahead of the 8.7% gain delivered by the S&P 500 Index ($SPX).

The Bill Case for

Solid Q3 results:’s results for the latest quarter exceeded expectations on both the top line and the bottom line – by a lot The stock gained 24.5% After release.

The company reported total revenue of $78.4 million for it. Fiscal third quarter ended in January, showing a year-on-year growth of 18 percent. The top-line growth was primarily driven by a 23% YoY increase in subscription revenue, which accounts for nearly 90% of the company’s total revenue.

During the past 3 years, the company’s revenue has grown at a CAGR of 19.76%. Further, this strong growth is expected to continue, as forward revenue growth is at 13.3 percent – ​​almost double the sector median of 6.6 percent. has yet to turn a profit, and in the most recent quarter, losses doubled to $0.13 per share from $0.06 last year. However, the quarterly loss was below the consensus estimate of a loss of $0.25 per share. Notably, the company’s losses have consistently beaten consensus estimates, which speaks to prudent financial management for a startup operating in a capital-intensive domain like AI.

The company closed the quarter with a cash and equivalents balance of $723.3 million.

Diversified Business:’s operations are diversified across industries, with the highest allocation at just 29% (state and local government). Other top contributors to the company’s booking distribution are federal, defense and aerospace (25%), manufacturing (16%), and agriculture (16%). Notably, bookings with partner support increased by an impressive 337% compared to the previous year.

Additionally, the company’s partner network includes top corporations such as Amazon’s AWS, Google Cloud, Microsoft, T-Mobile ( TMUS ) and Boston Scientific ( BSX ). At the government level, has partnerships with the US Department of Defense, San Mateo County, Daly City, and Riverside County in California, to name a few.

With a diverse set of partners across industries, corporations and government, C3.Ai is less vulnerable to headwinds in a particular industry, giving it revenue stability.

Generative AI: is also strengthening its creative AI offerings. In Q3, the company closed 17 C3 generative AI pilots across a wide range of industries, including federal, defense and aerospace. Agriculture and Forestry; and food processing, among others.

This follows 36 generative AI pilot deals signed during the second quarter of the fiscal year, With 21 of these customers having revenues exceeding $10 billion.

Moreover, has reported solid results from its GenAI users. Law firm DLA Piper used C3 Generative AI to reduce attorney time by 80% on 200+ point due diligence analyzes for limited partner agreements, and European firm Holcim – a leader in sustainable building solutions has completed a successful six-month pilot. with which led to a four-year agreement to scale C3 AI reliability across its 100+ cement plants.

A bear case for

Risks from Revenue Strategy Migration: is currently in the process of transitioning its revenue strategy. From a subscription-based service to a more advanced, consumption-based service, in which the firm charges for CPU/GPU usage as opposed to a pure subscription service.

This type of migration is gradual and can be subject to many growing pains, as seen in the SaaS industry nearly a decade ago. In particular, management has disclosed that the transfer may result in negative earnings growth for the firm, followed by flat earnings growth.

Loss of profit: is not profitable, and this is a concern for current and potential investors alike. What’s more, strong peers like Palantir ( PLTR ) and Salesforce ( CRM ) operate in industries that overlap with, making its path to profitability even more difficult.

standing value: Because remains non-profit, some traditional revenue evaluation metrics do not apply. However, those who do suggest the stock is likely overvalued at current levels.

The company is trading at forward price/sales and enterprise value/sales ratios of 12.37 and 10.05, respectively — well above the tech sector median of nearly 3x, and higher than AI software stocks such as UiPath ( PATH ).

The bottom line on AI stocks

The analyst community also has mixed feelings about stock. For one example, Morgan Stanley analyst Sanjit Singh poured cold water on the post-earnings rally, with an “underweight” rating and a $21 price target. At more than 12 times sales, he says, the stock’s valuation remains unattractive, and wrote, “If the growth profile of the business accelerates and core profits start to flow through the model, we can be more constructive.” Wanted.”

On the other hand, Wedbush analyst Dan Ives reiterated his “Outperform” rating, and raised his price target to $40 from $35. “We see this quarter as a step in the right direction for C3 as the company’s entire product portfolio for its AI platform improves operations, improves processes, and transforms businesses. creating unprecedented demand,” he wrote.

The overall analyst community rates the stock a “hold,” with an average target price of $29.17 — an 8.1% discount to Thursday’s close. Morgan Stanley’s price target is a 33.8% discount, while Ives’ Street High target implies an expected upside of 25.9%.

Among the 14 analysts covering the stock, 3 have a “strong buy” rating, 7 have a “hold” rating, 2 have a “moderate sell” rating, and 2 have a “strong” rating. “Sell” rating.

As at the date of publication, Pathikarat Bose did not have a position (directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. Please see the Barchart Disclosure Policy here for more information.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.

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