Since the beginning of 2023, investors have been mesmerized by developments in artificial intelligence (AI). The advances demonstrated by next-generation chatbots, including ChatGPT, helped illustrate the enormous potential of AI, which many believe will (eventually) impact every industry and sector.
The opportunity for enormous gains in the space has investors flocking to AI-related investments, resulting in triple-digit gains for several high-profile AI stocks.
C3.ai (AI -3.78%) seemed to be the poster child for that fervor. Even as the company struggled with macroeconomic challenges, its stock has soared as much as 293% since the beginning of 2023 heading into its financial release.
Those gains came to an abrupt halt Thursday, as the enterprise AI software provider reported earnings that suggested the company still has quite a bit of work to do.
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Flat -- literally
C3.ai titled its quarterly earnings release "Generative AI Changes Everything," which is ironic since the recent surge in AI did little to improve the company's weak financial performance. In what seemed like a curious move, the company didn't include the year-over-year percentage changes for financial metrics in its earnings release -- something it has historically provided. That move did little to change the actual results.
For its fiscal 2023 fourth quarter (ended April 30), C3.ai produced revenue of $72.4 million, which was essentially flat year over year, as the company has thus far failed to capitalize (financially) on the excitement surrounding all things AI. At the same time, C3.ai's cost of revenue surged, resulting in a wilting gross profit margin, which tumbled to 66%, compared to 76% in the prior-year quarter.
Operating expenses also climbed across the board, rising about 8% year over year. This put even more pressure on profits, as its loss from operations surged 30%. Interest income helped minimize the damage, resulting in a loss per share of $0.58, which worsened 5%. Things were slightly better on a non-GAAP (adjusted) basis, as its adjusted loss per share of $0.13 improved from a loss of $0.21 in the prior-year quarter.
For context, analysts' consensus estimates were calling for revenue of $71.4 million and a loss per share of $0.17, so C3.ai surpassed expectations.
Much of C3.ai's earnings release was dedicated to pointing out new customer wins, expanding relationships with existing customers, and cataloging the increasing diversity of the customer industries included in its 2023 bookings.
The earnings press release noted that "In the fourth quarter of [fiscal year 20]23, the company closed 43 agreements, including 19 pilots." It went on to say that the number of opportunities in its sales pipeline more than doubled over the past year. C3.ai also announced that its generative AI software was now available on Alphabet's Google Cloud Marketplace and the Amazon Web Services (AWS) Marketplace.
CEO Thomas Siebel chose to view the glass as half-full, saying the company is "well positioned to accelerate growth, gain market share, attain sustainable non-GAAP profitability, and establish a market-leading position globally in enterprise AI. [Fiscal year] 2024 will be exciting."
A stark contrast
For its fiscal 2024 first quarter, C3.ai is forecasting revenue of $71 million, or growth of about 9% at the midpoint of its guidance. The full-year 2024 forecast was only slightly better, guiding for revenue of $308 million, an increase of roughly 22% -- which hardly seems exciting. One need only compare that to the guidance provided by another AI-focused company to see the glaring difference in their respective outlooks.
When semiconductor specialist Nvidia released its financial report just last week, the company's results were surprisingly robust -- but its forecast was stunning. Wedbush analyst Daniel Ives went so far as to call Nvidia's outlook the "jaw-dropping guidance heard round the world," further noting that the "AI revolution has begun."
For its fiscal 2024 second quarter -- which ends in July -- Nvidia guided for revenue of $11 billion, which would represent growth of 64% year over year and mark the company's highest quarterly revenue ever. This stands in stark contrast to C3.ai's somewhat tepid outlook. This clearly isn't an apples-to-apples comparison, but it does serve to illustrate that all companies in the AI space are not created equal.
C3.ai recently made a drastic change to its pricing policy, pivoting from a subscription-based to a consumption-based model. The jury is still out as to whether this will ultimately increase demand for its AI-based software.
It's certainly possible that these changes will supercharge the company's business, aided by the ongoing AI boom. Until there's evidence that its turnaround is taking hold, however, investors should exercise care with C3.ai stock and size their positions accordingly.
