Is C3.ai Stock a Buy Now?

C3.ai's (AI 0.09%) stock plunged nearly 25% during after hours trading on June 1 following its fourth-quarter earnings release. The artificial intelligence (AI) software company's revenue rose 38% year-over-year to $72.3 million, which beat analysts' expectations by about $1 million.

Its adjusted net loss widened from $33 million to $76.7 million, or $0.21 per share, but still topped the consensus forecast by $0.08. But on a generally accepted accounting principles (GAAP) basis, its net loss ballooned from $55.7 million to $192.1 million. The company's guidance for the current quarter and the full year also disappointed investors.

The stock plunged in the immediate aftermath of the report, but by Friday's close was trading for more than it was prior to the quarterly report's release. However, the stock is down 36% so far this year. Should investors accumulate some shares of C3.ai after its latest report, or does this former high-flying stock have a lot more room to fall?

Image source: Getty Images.

What happened to C3.ai?

C3.ai mainly develops AI algorithms for large enterprise customers (especially in the energy and industrial sectors) and government agencies. Its algorithms can be integrated into an organization's existing software infrastructure or accessed as stand-alone services, and can be used to optimize operations, improve employee safety, cut costs, and detect fraud.

C3.ai's revenue surged 71% in fiscal 2020, which ended in April of that calendar year, but rose just 17% to $183.2 million in fiscal 2021 as the pandemic disrupted the energy and industrial markets. That deceleration also exposed C3.ai's heavy dependence on a joint venture with Baker Hughes (NASDAQ: BKR), the energy giant that accounted for nearly 31% of its revenue in fiscal 2021.

C3.ai's slowing growth, customer concentration issue, and lack of profits all spooked the bulls, and its stock plunged from an all-time high of $177.47 in December 2020 to the mid-teens as of this writing.

A brief recovery followed by a grim outlook

C3.ai's revenue rose 38% to $252.8 million in fiscal 2022 as pandemic-related headwinds abated. It ended the year with 223 customers, up 48% from a year earlier, and its remaining performance obligations (RPO) -- the remaining value of an existing contract which hasn't been invoiced and recognized as revenue yet -- and revenue steadily improved over the past year:

Data source: C3.ai. YOY = Year-over-year.

That recovery was encouraging, but the company said it expects revenue to rise just 24%-28% year-over-year in the first quarter of fiscal 2023 and 22%-25% for the full year. Analysts had expected its full-year revenue to rise about 34%.

During the conference call with analysts, CEO Tom Siebel attributed that slowdown to "economic and political" uncertainties, "pervasive market passivism", delayed deals, and "too much lumpiness" in its pipeline. Nevertheless, Siebel still predicted that the company would return to 30%-35% "steady-state top-line growth" after the "market conditions stabilize."

We won't know if C3.ai's customer concentration issue improved in the fourth quarter until it provides more details in its annual 10-K report, but we already know that its joint venture with Baker Hughes accounted for a whopping 39% of its revenue throughout the first nine months of fiscal 2022.

No clear path toward profitability

C3.ai's non-GAAP gross profit rose 43% to $200.5 million in fiscal 2022, which boosted its non-GAAP gross margin from 76% to 79%.

However, its non-GAAP operating loss still widened from $37.5 million to $80.7 million. In fiscal 2023, it expects to post another non-GAAP operating loss of between $76 million and $80 million.

All that red ink contradicts Siebel's statement during the latest conference call that C3.ai is a "structurally profitable business." Siebel also said the company can generate a "sustainable positive free cash flow within eight to 12 quarters" -- but that's a distant goal, and its actual free cash flow came in at negative $14.8 million in the fourth quarter.

On the bright side, C3.ai won't run out of money anytime soon. It ended the fourth quarter with $960 million in cash, cash equivalents, and short-term investments, and its low debt-to-equity ratio of 0.2 gives it breathing room to raise additional cash through new debt offerings.

Is it the right time to buy C3.ai?

At $14 per share as of this writing, C3.ai is valued at $1.5 billion, or about five times its estimated sales for fiscal 2023. That price-to-sales ratio is reasonable for a company that aims to generate over 20% revenue growth this year, but its customer concentration issue and steep losses are impossible to ignore.

Investors can easily find more stable tech stocks that are trading at comparable valuations in this market. Salesforce, which is larger, better diversified, and more profitable than C3.ai, plans to generate roughly 20% revenue growth this year but trades at 6 times that forecast.

Simply put, C3.ai's downside might be limited at these levels, but I expect it to stay in the penalty box until it rectifies its biggest problems.