Is C3.ai Stock a Buy Now?

C3.ai's (AI -1.48%) stock price tumbled nearly 16% during after-hours trading on Aug. 31 following the release of the company's first-quarter earnings report. The enterprise AI software company's revenue rose 25% year over year to $65.3 million, which missed analysts' estimates by $0.7 million.

On a GAAP (generally accepted accounting principles) basis, its net loss widened from $37.5 million to $71.9 million. But on a non-GAAP basis, it narrowed its net loss from $22.7 million to $13.2 million, or $0.12 per share, which cleared the consensus forecast for a net loss of $0.24.

Image source: Getty Images.

However, C3.ai expects its revenue to rise just 3%-6% year over year in the second quarter and to grow 1%-7% for the full year. That was well below its prior forecast for 22%-25% revenue growth for the full year. 

Does that gloomy guidance indicate it's time to give up on C3.ai, which now trades more than 60% below its IPO price of $42? Or can this struggling company stabilize its business and stage a comeback over the next few quarters?

Why is C3.ai's growth stalling out?

C3.ai develops AI algorithms that can be used to optimize an organization's operations, cut costs, improve employee safety, and detect fraud. These tools can either be integrated into a client's existing software infrastructure or accessed as stand-alone services. It primarily serves large energy, industrial, and government customers, and its largest customer by far is the energy giant Baker Hughes (BKR -1.53%), with whom it operates a joint venture.

C3's revenue soared 71% in fiscal 2020, which ended in April of the calendar year, but grew a mere 17% in fiscal 2021 as the pandemic disrupted the energy and industrial sectors. Its revenue rose 38% to $253 million in fiscal 2022 as those headwinds passed, but its year-over-year growth in remaining performance obligations (RPO, or the future revenues it expects to generate from its existing contracts) and total revenue still cooled off significantly over the past three quarters:

Data source: C3.ai. YOY = Year over year. RPO = Remaining performance obligations. GAAP = Generally accepted accounting principles.

The company's dismal outlook for the rest of the year indicates those double-digit percentage growth rates will quickly cool to the single digits. It mainly attributed that slowdown to macro headwinds instead of competitive challenges.

During the conference call, CEO Tom Siebel said its customers "appear to be expecting a recession" and that their orders were "consistent with that expectation." Siebel also warned that the forthcoming "market downturn could be significant."

Changing its underlying business model

Nevertheless, Siebel still expects its revenue growth to "revert to historical annual growth rates" of more than 30% in fiscal 2024 and beyond. To accomplish that, it's drastically changing its original business model. Back when it went public in 2020, the company generated most of its revenue from large customers and recurring subscriptions.

But over the past year, C3.ai has been pursuing smaller, lower-value customers to diversify its business away from Baker Hughes and its other large enterprise and government customers. As a result, its average total contract value (TCV) declined 52% sequentially to $1.4 million in the first quarter.

It also plans to shift from its subscription-based model to a consumption-based one, which would free its clients from recurring subscriptions and only charge them based on their usage rates. That flexible pricing model, which is also used by other cloud software companies like Snowflake and Twilio (TWLO -0.61%), could be more widely accepted in this tough macro environment.

Yet both of these strategies are risky. C3.ai needs to gain a lot of smaller customers to reduce its dependence on large enterprise and government contracts, and eliminating its sticky subscriptions could result in lower and lumpier revenue.

Focusing on narrower losses

As C3.ai shifts gears, its gross margins remain steady at around 80%. It's also narrowing its non-GAAP operating losses.

Data source: C3.ai. Non-GAAP basis.

For the full year, it expects to post a negative non-GAAP operating margin of about 36%, compared to its negative operating margin of 44% in fiscal 2022. That might only seem like a slight improvement, but Siebel claims that C3.ai can achieve "non-GAAP profitability and cash positivity from normal business operations" by fiscal 2024.

The stock still isn't a screaming bargain yet

C3.ai might recover over the next few years, but its abrupt guidance cut for the full year suggests that investors should be deeply skeptical about its rosy expectations for fiscal 2024.

Its stock also isn't cheap at six times this year's sales. Twilio, the aforementioned cloud-based communications company which is still growing much faster than C3.ai, trades at just three times this year's sales. C3.ai could easily be cut in half again in this challenging market, so investors should avoid it for now and stick with more stable cloud software stocks instead.