Don't Buy C3.ai Stock Until This 1 Thing Happens

It hasn't been a good year for C3.ai (NYSE: AI). Amid an artificial intelligence (AI) boom and soaring demand for AI software that has catapulted Palantir Technologies to stardom, C3.ai's stock has tumbled more than 61% over the past year.

It's hard to make sense of it until you look underneath the surface. In total, C3.ai has fallen 92% from its all-time high and currently trades at a market capitalization of just $2 billion.

Here is what is weighing the stock down, and the most critical thing to wait for before investors should consider buying C3.ai's stock.

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Poor execution and uncertainty have plagued the stock

C3.ai offers AI software, including prebuilt applications, a development platform for custom applications, and generative AI that analyzes data and provides insights to customers. Overall, C3.ai is similar to and competes with Palantir. But unlike Palantir, C3.ai hasn't been able to translate overwhelming AI demand into strong business results.

It appears that C3.ai's misfortunes stem from a combination of bad luck, flawed strategy, and subpar execution.

At the start of its fiscal year 2023, C3.ai began transitioning its billing model from a subscription-based to a consumption-based model. This past August, C3.ai announced another restructuring, this time of its sales and services staff and operations. Roughly a month later, CEO Thomas Sieber stepped down due to health concerns.

Following the appointment of Stephen Ehikian as the new CEO in September, C3.ai withdrew its full-year outlook. A recent report alleged that C3.ai is now considering a potential sale or additional fundraising in light of its struggles. This much disruption within a company can be damaging, especially given how quickly AI has moved over the past couple of years.

The business has lost nearly $86 million in free cash flow over the past four quarters. Its net loss of $342 million during that span is almost equal to its $372 million in revenue. To put it simply, C3.ai has been a mess, and the financial results reflect that.

Do not buy until C3.ai generates free cash flow

Investors can earn huge returns on a winning contrarian investment, but C3.ai looks more like a falling knife than anything right now.

Given C3.ai's struggles, it probably won't be clear that the new CEO has the company on the right track until at least several more quarters have passed under his leadership. Ideally, C3.ai can string together at least a few consecutive quarters where free cash flow is positive and growing. At that point, investors can begin to feel good that the new CEO is making a positive impact. Investors may want to steer clear of C3.ai until then.

Yes, waiting could mean missing out on the stock's lowest price. But waiting also protects you from losses. Remember, C3.ai is still worth only $2 billion. There will be considerable long-term upside if C3.ai can establish itself as a legitimate competitor in the AI software market. The stock is a multibagger at a fraction of Palantir's size.

If C3.ai does turn it around and earn your money, you'll be buying with a smile on your face, even if the share price is higher by then.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.