C3.ai Stock: Only Get In if You Can Hold for Years

Want to get direct exposure to the artificial intelligence (AI) market? One simple way is to invest in enterprise AI software company C3.ai (NYSE:AI). However, there are both green flags and red flags with C3.ai, so consider your time horizon and risk tolerance if you plan to own AI stock.

Furthermore, don’t buy C3.ai stock unless you’re on board with the company’s investments in AI technology. C3.ai is spending money now in hopes that it will pay off later. There are no guarantees of success, so be patient and keep your position size small.

Good and Not-so-Good News for AI Stock Investors

First, I’ll start off with some positive data points from C3.ai’s second-quarter fiscal 2024 results. The company’s customer engagement grew 81% year over year (YOY), and C3.ai’s revenue increased 17% to $73.2 million. These stats suggest that the demand for enterprise AI software remains robust.

On the other hand, that revenue figure fell toward the lower end of C3.ai’s guidance range, which was previously set at $72.5 million to $76.5 million. Moreover, C3.ai’s $73.2 million in quarterly revenue missed Wall Street’s consensus call for $74.3 million.          

As you can see, the good news isn’t all good. What about C3.ai’s bottom-line results, though? In Q2 FY2024, the company posted a GAAP earnings loss of 59 cents per share. On the other hand, C3.ai’s non-GAAP loss of 13 cents per share was better than the analysts’ consensus estimate of a loss of 18 cents per share.

What really concerned investors about C3.ai’s quarterly press release was the company’s forward guidance. For the current quarter, Wall Street called for a $21.1 million non-GAAP operating loss. In contrast, C3.ai disclosed its outlook for a much deeper non-GAAP operating loss of $40 million to $46 million.

Don’t Expect C3.ai’s Investments to Pay Off Immediately

Most likely, C3.ai’s disappointing current-quarter operating-loss guidance reflects the company’s expectation that it will spend a lot of money investing in AI technology. Referring to C3.ai and the company’s management, D.A. Davidson analyst Gil Luria elaborated on this topic:

“Management believes that given the opportunity ahead, it needs to deepen investments in application development, model engineering, lead generation, market awareness and customer success to capture market share.”

“Deepening investments” implies spending substantial capital today in hopes of better results down the line. Unfortunately, Luria added, “These investments are not expected to drive near term growth as management maintained its FY24 revenue guide.”

C3.ai CEO Tom Siebel seems unapologetic about freely spending money to develop the company. Referring to the company’s roughly $800 million in cash holdings, Siebel proclaimed, “I have almost $800 million in the bank… What else am I supposed to do with it? I’m investing it in the business.”

Actually, there’s no requirement that C3.ai must spend its money now. Hence, you’ll have to be willing to overlook a possible lack of financial discipline if you intend to invest in C3.ai.

Stay Small and Be Patient With C3.ai Stock

I’ve been bullish on C3.ai stock before, and I still like the company’s commitment to developing AI technology. However, it’s somewhat troubling that C3.ai is so eager to spend its cash now.

C3.ai’s capital outlays might not yield measurable results for months or even years. Therefore, investors should reduce their risk by only maintaining a small position in AI stock, and by only buying it if they’re prepared to stay in the trade for a long time.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.