The past six months have been horrible for C3.ai (NYSE:AI) investors, as shares of the enterprise AI software provider have fallen sharply after a solid start to 2024. The stock has fallen 42% since hitting a 52-week high on Feb. 29. The company’s latest quarterly results have only added to the pessimistic sentiment surrounding the stock.
C3.ai released its fiscal 2025 first-quarter results (for the three months ending July 31) on September 4. Investors hit the panic button after the company’s report, even though it reported better-than-expected numbers. What’s going on here? And more importantly, could this sharp drop in the company’s stock price in recent months be a buying opportunity for investors looking to capitalize on the growing demand for artificial intelligence (AI) software?
C3.ai’s growth has accelerated, but it has come at a price
C3.ai reported fiscal Q1 revenue of $87.2 million, up 21% from the year-ago quarter when revenue rose just 11%. This was the fifth consecutive quarter in which the company’s revenue growth accelerated.
Q1 revenue topped analysts’ consensus estimate of $86.9 million. Additionally, the company’s adjusted loss narrowed to $0.05 per share from $0.09 in the year-ago period. Wall Street had expected the company to post a non-GAAP (adjusted) loss of $0.13 per share.
Slower-than-expected growth in the company’s subscription revenue, which rose 20% year over year to $73.5 million but was below the consensus estimate of $79.1 million, was one reason the market reacted negatively to C3.ai’s results. In addition, the company expects its non-GAAP operating loss to widen to $30.7 million in the current quarter, from $16.6 million in the previous quarter, at the midpoint of its forecast range.
That would also be higher than the $25 million non-GAAP loss it reported in the same period last year. C3.ai management noted during its latest earnings conference that the increased losses are a result of its efforts to win more business and its focus on bolstering its sales force. According to CFO Hitesh Lath:
We continue to expect near-term pressure on our gross margins due to (a) a higher mix of pilots, which will result in higher cost of revenues during the pilot phase of the customer lifecycle. We also expect near-term pressure on our operating margin due to additional investments we are making in our business, including our sales force, research and development, and marketing spend.
Lath added that C3.ai will have negative cash flow in the current quarter and the next quarter. However, he predicts that the company will have positive free cash flow in Q4 and that it will have positive free cash flow throughout the fiscal year. Another thing worth noting here is that C3.ai’s revenue growth is now outpacing its operating expense growth.
AI Revenue (Quarterly) Data from YCharts
The reason this is happening is that C3.ai’s “cost of goods sold” is substantially lower than our cost to generate revenue, according to CEO Tom Siebel. Management believes that revenue growth rates will likely outpace cost growth rates, even as C3.ai continues to focus on capturing a larger share of the fast-growing market for enterprise AI software.
A look at the bigger picture
The good news is that C3.ai’s focus on winning more business is paying off. The company closed 71 customer deals last quarter, up from 32 during the same period last year. It’s also worth noting that it’s now closing larger deals with customers. For example, the company closed two deals worth $5 million to $10 million last quarter, compared to none during the same period last year. The number of deals worth $1 million to $5 million also increased to 11 this quarter, up from nine last year.
The improved deal activity explains why C3.ai is expecting another quarter of acceleration in its revenue in Q2. It expects revenue of $88.6 million to $93.6 million in the current quarter, which would result in year-over-year growth of about 24.5% at the midpoint.
C3.ai reiterated its full-year revenue guidance of $370 million to $395 million, which would be a 23% increase from last year. But it wouldn’t be surprising to see its annual revenue come in at the higher end of that forecast if its deal activity continues to improve. The company’s generative AI offerings are gaining traction with both government and commercial customers.
Furthermore, the generative AI software market is predicted to generate an annual revenue of $52 billion by 2028, up from $5.1 billion last year. So there is a good chance that the company can maintain its improving growth rates in the long term.
With C3.ai shares trading at less than 8 times revenue (a large discount to peers) PalantirGiven its price-to-sales ratio of 29, investors looking for an AI stock that isn’t too expensive and looks like it could generate healthy profits in the long run may want to consider using the pullback to buy the stock, as it could prove to be a long-term success.
Should You Invest $1,000 in C3.ai Now?
Before you buy shares in C3.ai, you should consider the following:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and C3.ai wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $652,404!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of September 9, 2024
Harsh Chauhan 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.
