Where will C3.ai stock be in 5 years?

It’s been almost four years now C3.ai (NYSE:AI) has gone public, and a look at the company’s stock market performance since its initial public offering (IPO) doesn’t paint a pretty picture. The shares have lost 72% of their value since then.

The stock spiked in the first half of 2023 as hype around artificial intelligence (AI) technology gained momentum, but even those gains have faded. Even 2024 has unfolded in a similar way for C3.ai investors; After a good start, the stock lost momentum and is down 8% this year. This is in stark contrast to fellow AI software specialists Palantir Technologieswhich has witnessed a 162% increase in its share price this year on the back of growing demand for its AI software platforms.

But can C3.ai turn its fortunes around and become a solid investment over the next five years? Let’s find out.

C3.ai operates in a fast-growing market with enormous potential

According to market research firm IDC, demand for AI software platforms is expected to grow nearly 41% annually over the next five years. More specifically, the size of this market is expected to rise to $153 billion by 2028, up from just $28 billion last year. Thus, the possibility of a turnaround in C3.ai’s fortunes cannot be ruled out as the market the company serves is currently in the early stages of its growth.

It’s worth noting that the stock’s underperformance in recent years is the result of a change in its business model from a subscription-based service to a consumption-oriented service. C3.ai made this change in August 2022, the beginning of the second quarter of fiscal year 2023. As the following chart tells us, the company’s growth took a hit after the business model change in the second half of 2022.

AI Revenue (TTM) data from YCharts

C3.ai management pointed out at the time that it would take nearly seven quarters for the business model change to scale and help the company achieve the revenue growth levels it achieved before the transition. The company seems to put its money where its mouth is.

C3.ai released its first quarter fiscal 2025 results (for the three months ended July 31) in September this year. This was the eighth quarter since the company announced the change in business model, and the company reported a 21% year-over-year increase in revenue to $87.2 million. That was an improvement over the 16% revenue growth the company posted in fiscal 2024 to $310.6 million.

C3.ai’s 2025 revenue forecast of $370 million to $395 million indicates that revenue could rise 23% year-over-year at the midpoint. That points to an improvement in C3.ai’s growth this year, suggesting that the change in the company’s business model is indeed working.

One reason why that may be the case is that the move to a consumption-based model means C3.ai has lowered the barrier to entry for customers looking to deploy generative AI applications. Previously, C3.ai customers had been required to enter into subscription contracts for a certain period of time, forcing the two parties to enter into negotiations.

But that is no longer the case. Under the pay-as-you-go model, customers now only have to pay for the services they use. This reduced friction explains why there has been a significant increase in the number of pilot projects C3.ai is currently working on. In the first quarter of fiscal 2025, C3.ai was involved in a total of 52 pilot projects, compared to 24 in the same quarter last year.

At the same time, the number of deals the company has signed has increased significantly recently. C3.ai closed a total of 71 deals in the first quarter of fiscal 2025, compared to just 32 in the same quarter last year. Something else worth mentioning is that the company now gets a good chunk of its deals from federal agencies.

Management pointed out during the September earnings conference call that the company “has entered into new expansion agreements with the U.S. Air Force, U.S. Navy, U.S. Marine Corps, and the U.S. Intelligence Community, among others.” Additionally, the company now gets more than 30% of its bookings from federal agencies, indicating that it is gaining influence in this potentially lucrative market where Palantir has been the dominant player to date.

Analysts are understandably optimistic about C3.ai’s future growth prospects and expect revenue to grow by healthy double digits in the coming years.

AI revenue estimates for current fiscal year data based on YCharts

At the same time, C3.ai’s unit economics also appear to be becoming favorable. This is evident from the fact that income is rising faster than expenditure, as shown in the graph below.

AI total spend data (quarterly) according to YCharts

The chart also shows us that C3.ai’s spend is declining, which bodes well for its longer-term results.

Solid earnings growth could lead to healthy profits over the next five years

A combination of healthy revenue growth and an improving cost profile should make C3.ai profitable in the long term. Analysts expect the company to post an adjusted loss of $0.54 per share in the current fiscal year. However, this number is expected to decrease in the coming financial year.

AI EPS estimates for current fiscal year data based on YCharts

More importantly, C3.ai is expected to achieve non-GAAP profitability within a few fiscal years, as seen in the chart above. In fact, analysts expect C3.ai’s bottom line to improve by nearly 51% annually over the next five years. That’s impressive when you consider that rival Palantir’s revenues are expected to grow at a compound annual rate of 57% over the next five years.

However, the big difference between these two AI stocks is the valuation. While C3.ai trades at 9.4x revenue, Palantir has a very rich price-to-sales ratio of 43.

C3.ai could therefore be a good choice for investors given its acceleration in growth, relatively attractive valuation and ability to deliver robust earnings growth. The combination of these factors could help the stock overcome its disappointing performance and post attractive profits over the next five years.

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