The artificial intelligence (AI) market caught fire over the past year as the rapid growth of generative AI platforms like ChatGPT dazzled investors. That boom drove the bulls straight toward leading AI plays like Nvidia, which supplies the chips for processing complex AI tasks, and Microsoft, the biggest backer of ChatGPT’s parent company, OpenAI.
But not everything that glitters across the AI market is gold. Today, I’ll look at three troubled AI-oriented stocks — C3.ai (NYSE: AI), SentinelOne (NYSE: S), and Domo (NASDAQ: DOMO) — that investors will want to avoid at all costs.
Image source: Getty Images.
C3.ai attracted a lot of attention when it went public in December 2020 for three reasons: It had a catchy ticker symbol, it was founded by the industry veteran Tom Siebel, and it was growing like a weed.
Its AI algorithms, which can be integrated into an organization’s existing software to automate and streamline tasks, also made it a promising play on the digital transformations of sprawling organizations.
But today, C3.ai trades about 30% below its initial public offering (IPO) price. The bulls retreated as C3.ai’s growth cooled off, it remained deeply unprofitable, and rising interest rates popped its bubbly valuations.
It also has gone through three chief financial officers since its IPO, repeatedly changed its customer growth metrics, and abruptly pivoted from a subscription-based model to a usage-based one to cope with the macro headwinds over the past year. C3.ai also still generates more than 30% of its annual revenue from a joint venture with the energy giant Baker Hughes that is set to expire in fiscal 2025 (which ends in April 2025), and there’s still no guarantee that crucial deal will be renewed.
Revenue rose 38% in fiscal 2022, but it grew a mere 6% in fiscal 2023 (compared to management’s initial outlook for 22% to 25% growth). The company claims it can generate 10% to 20% growth in fiscal 2024, but its habit of overpromising and underdelivering raises more than a few red flags.
It’s also expected to stay unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP measures this year. On top of all of those flaws, C3.ai’s stock still looks expensive at 11 times this year’s sales.
SentinelOne impressed the bulls upon its public debut in June 2021 with its breakneck revenue growth and ambitious goal of replacing all human cybersecurity analysts with its Singularity platform’s automated AI-powered algorithms. Unfortunately, this hypergrowth cybersecurity stock now trades more than 50% below its IPO price.
After more than doubling its annual revenue in each of the past three fiscal years, SentinelOne expects its revenue to rise 40% to 42% in fiscal 2024 (which ends next January). Management mainly blamed macro headwinds for the slowdown, but SentinelOne’s larger and more diversified competitors — including Palo Alto Networks and CrowdStrike Holdings — have also been rolling out more AI-powered tools.
That competitive pressure is troubling, because SentinelOne still isn’t profitable by GAAP or non-GAAP measures. It also recently changed the way it reported its annual recurring revenue (ARR) to account for some “historical inaccuracies.” Its critics are questioning the reliability of its fully automated approach to countering cyberattacks without any human intervention, and several recent reports claim it’s thinking of selling itself.
Those buyout rumors generated some fresh interest in SentinelOne’s stock, but it still isn’t a screaming bargain at 9 times this year’s sales. Its shares could head even lower as long as it bleeds red ink and its revenue growth keeps cooling off.
Domo’s cloud-based platform enables business leaders to monitor their entire organization through unified dashboards on a single app. These dashboards bundle together a wide range of data visualization, analytics, and collaboration tools.
Domo initially caught the market’s attention when it went public in 2018 because Amazon founder Jeff Bezos was one of its earliest investors. It also subsequently grew at a steady clip: From fiscal 2019 to fiscal 2023 (which ended this January), its revenue had a compound annual growth rate of 21%.
But for fiscal 2024, Domo expects its revenue to rise a mere 2% to 4% as it faces much tougher macro and competitive headwinds. It could be struggling to keep pace with larger tech companies, including Salesforce and Microsoft, which also bundle similar data visualization and business intelligence tools into their cloud-based ecosystems.
Like C3.ai, Domo also shifted from stickier subscriptions toward a usage-based model to attract more customers in a more challenging macro environment. But that shift reduced its revenue per customer and likely eroded its own competitive defenses. It also remains unprofitable by GAAP and non-GAAP measures.
In its latest conference call, management mentioned “AI” more than 20 times and claimed that new AI-powered analytics tools would drive its long-term growth. But most of its larger competitors like Microsoft and Salesforce already provide similar AI-powered services. That’s why Domo’s stock now trades at a near-50% discount to its IPO price — and why it still can’t be considered a deep value play at just over 1 times this year’s sales.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon.com, CrowdStrike, and Palo Alto Networks. The Motley Fool has positions in and recommends Amazon.com, CrowdStrike, Microsoft, Nvidia, Palo Alto Networks, and Salesforce. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
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