C3.ai (NYSE:AI) was one of the hottest tech IPOs on the market when it went public four years ago. The artificial intelligence (AI) software provider went public at $42 per share, and its shares have more than quadrupled in less than a month to a record high of $177.47.
But by the end of 2022, C3.ai’s stock had sunk to around $10 per share. It lost its luster as sales growth cooled, posting steep losses and investors worried about customer concentration issues. The stock rose again to around $38 over the next two years, but also struggled to rise above its IPO price again.
C3.ai probably hasn’t created any new millionaires since its public debut. But could this divisive company prove the bears wrong and generate profits for millionaires for years to come?
C3.ai develops AI algorithms that connect directly to an organization’s existing infrastructure to accelerate, automate and optimize certain tasks. It also offers these algorithms as standalone modules. It originally provided its services only through subscriptions, but in 2022 it focused on consumption-based fees.
C3.ai primarily serves large government, financial, energy and industrial customers, but generates most of its revenue from a joint venture with the energy giant Baker Hughes (NASDAQ: BKR). That partnership accounted for 35% of revenue in fiscal year 2024 (which ended in April 2024), and these minimum revenue commitments will still account for approximately 32% of projected revenue in fiscal year 2025.
However, that important deal expires at the end of 2025 and has not yet been extended. That lack of clarity is troubling, as Baker Hughes has actually negotiated lower minimum revenues over the past two years while reducing its equity stake in C3.ai.
Additionally, C3.ai faces stiff competition from first-party AI services that are directly integrated into cloud platforms such as Microsoft‘S (NASDAQ: MSFT) Azure, Alphabet‘s Google Cloud, and Amazon Web Services (AWS); diversified big data platforms such as Salesforce; and robotic process automation (RPA) companies love it UiPath. Newer and more flexible generative AI tools like OpenAI’s ChatGPT could disrupt the business model.
C3.ai also seems to have management issues. Since its public debut, there have been four CFOs, its customer growth metrics have changed several times, and in the past year it has abruptly abandoned its short-term goal of achieving non-GAAP (adjusted) profitability in favor of developing more tools for the generative AI -market.
C3.ai’s revenue growth has been very uneven over the past five fiscal years. Revenues initially soared in fiscal 2020, cooled in fiscal 2021 amid the pandemic, but accelerated again in fiscal 2022 as headwinds eased.
|
Metric |
Financial year 2020 |
Financial year 2021 |
Financial year 2022 |
Financial year 2023 |
Financial year 2024 |
|---|---|---|---|---|---|
|
Sales growth |
71% |
17% |
38% |
6% |
16% |
|
Adjusted gross margin |
76% |
76% |
79% |
77% |
69% |
Data source: C3.ai.
But in fiscal 2023, C3.ai’s growth stalled as the company faced tougher macroeconomic headwinds on corporate spending and deliberately cannibalized its own higher-priced subscriptions with its lower-value consumption-based fees. Growth accelerated again in fiscal 2024 as the macro environment warmed again, and she expects growth of 22% to 28% in fiscal 2025.
Analysts expect revenue to grow at a compound annual growth rate (CAGR) of 21% between fiscal 2024 and fiscal 2027. It attributes this acceleration to new U.S. government contracts, new deals with state and local governments, and more demand from the energy sector . and the gradual growth of its generative AI business. It also expects to reach more cloud customers through a deeper “strategic alliance” with Microsoft Azure.
C3.ai’s adjusted gross margin also grew one percentage point year over year to 70% in the first half of fiscal 2025, but expect the rollout of new generative AI pilot programs to compress this metric in coming quarters. Analysts also expect the company to remain highly unprofitable for the foreseeable future, both on generally accepted accounting principles (GAAP) and non-GAAP measures.
With an enterprise value of $4.2 billion, C3.ai trades at eleven times this year’s revenue. That’s a high rating for a company that still has serious customer concentration and profitability issues. The recent rally appears to be driven by the buying frenzy in Generative AI stocks, but could crash again if it loses Baker Hughes or fails to convert its Generative AI pilot partners into paying customers. Simply put, I don’t think C3.ai can generate millionaire profits for its investors in the short term. Instead, I think it’s smarter to sell this volatile AI stock after its recent gains.
Before purchasing shares in C3.ai, consider the following:
The Motley Fool stock advisor The analyst team 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 ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $822,755!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns December 9, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool holds positions in and recommends Alphabet, Amazon, Microsoft, Salesforce, and UiPath. The Motley Fool recommends C3.ai and recommends the following options: long calls in January 2026 for $395 at Microsoft and short calls in January 2026 for $405 at Microsoft. The Motley Fool has a disclosure policy.
Can C3.ai Stock Help You Retire a Millionaire? was originally published by The Motley Fool
/cdn.vox-cdn.com/uploads/chorus_asset/file/25791095/VRG_VST_1214_Site.jpg)
