Here's Why C3.ai Stock Is Down Over 80% From Its High

After initially being well received by investors, shares of C3.ai (AI -4.76%) have steadily plummeted since reaching their all-time high about a year ago. While many other technology stocks are also down, the drop with C3.ai stock has been bigger than most. In this video clip from Motley Fool Backstage Pass, recorded on Dec. 6, Motley Fool contributor Jason Hall explains to his fellow contributors Danny Vena and Jon Quast why he believes the stock has fallen out of favor. Spoiler alert: Many of C3.ai's customers may not be seeing enough reason to increase their spending.

Danny Vena: Well, Jason Hall, why don't you talk to us a little bit about C3.ai. Now, I want to preface this by saying, I actually covered their quarterly earnings last week in a Fool article. It was one of those situations where the results were not bad, but the stock got punished. What's up with that?

Jason Hall: Before I can get into that, just some background context when Danny and I were talking about the show today, I suggested that we look at two companies that went public about the same time that are both in cloud and software-as-a-service, but they don't do the same thing. C3.ai and Snowflake, they do very different things. Their stocks have gone in very different directions. Where C3.ai stock has continued to plummet and Snowflake stock established itself and it's actually recovered a lot of its losses. Here's the thing. I'm going to share my screen here, and you look at the comments.

Just what I'm going to do is I'm just going to walk through a couple of pages in the investor presentation from their earnings. Like Danny said, so you look at it right here, off the top. Revenue was up 41%. Hey, that's pretty good. Subscription revenues up 32%. Maybe you'd like to see that growing faster. Subscription revenues, that's like the core. You really like that growing faster than revenue, but it's still growing at a good rate. Gross profits up 35%, not quite as good as revenues, but still it's up. We know it's spending more money in this managing its costs. RPO was up 74%. Hey, that's great because this is the business where they sign those subscriptions. They get paid a lump sum of money, so they get the cash up front, then they recognize the revenue as they provide that portion of the contract over each financial period. That means they're signing customers up. That's really good if RPO is growing faster than subscription service or revenue, that means that we should see those numbers start to accelerate. That's really what it tells us.

Vena: Doesn't that give us a little bit of insight into what their future growth is?

Hall: Entirely does, because that RPO today is cash in the bank, but it's revenue next quarter and the quarter after that, and the quarter after that. That's really good. Then you look at that cadence of revenues growth. You see, it looks like every year they bring up the revenue, and it's pretty stable, then it comes up again, it comes up again. ... Am I still here guys or did you lose me? Am I still here?

Jon Quast: We lost you for a minute there, Jason.

Vena: I lost you for a minute, too. I wasn't sure if it was you or me.

Hall: It was me. I heard my little beep thing. Anyway, you see the cadence of revenues and you see that over the past trailing 12 month,s revenue growth is accelerated. Hey, these things are looking pretty good here.

I'm going to hop out of the screen share for a second. Actually, you know what I can do? Well, I'm going to hop out of the screen share. There's one more little piece of data that they announced that was also positive. That's the number of customers was up. I've got a great slide I can share here. This is from Beat & Raise when we covered it. Customer count was up 63%. Lots of good little things here.

But here's why the stock is doing this. Right here. That Baker Hughes contract. On the earnings call, the CEO talked about how Baker Hughes continues to be a big win. They just locked in an extension of their contract with Baker Hughes. This was the second time they've expanded and extended their relationship and their contract with Baker Hughes, and now their contract with Baker Hughes is for almost $500 million in revenue, and $357 million of that is going to come over the next three-and-a-half years. Without dragging people through the painful exercise right now, if you do the math, not all of it, an outsize portion of the RPO growth, an outsize portion of its revenue growth is tied to Baker Hughes.

It's actually seeing smaller revenue. Again, think about this way. Customer count increased 61% in the quarter. Subscription revenue only increased 32%. There's a detachment from that. What we're seeing, to put little bow on this, Danny, then we can talk a little bit about it, by and large what we're seeing is companies are coming to C3 and they're signing up for subscription or they're contracting for a project or something. But by and large, it's little nibbles. They're still trying to figure out how they can leverage not just C3.ai as a partner, but how can they leverage AI within their enterprise. I think that's the biggest challenge the company's dealing with right now, is finding the opportunities where businesses can leverage AI in a meaningful way that they are willing to sign up for a long-term contract. Right now, Baker Hughes unequivocally has identified a way that it can take advantage of C3.ai. But it doesn't seem like the majority of its customers are experiencing the same thing so far. That, plain and simple, that's why the stock price has continued to fall.