Is C3.ai Stock a Buy Now?

C3.ai's (AI -2.82%) stock plunged 22% in after-hours trading this past Wednesday, following the release of its latest earnings report. Let's review.

For the fourth quarter of its fiscal 2023, which ended on April 30, the artificial intelligence (AI) enterprise software company's revenue stayed nearly flat year over year at $72.4 million, but still surpassed analysts' expectations by $1 million. The company narrowed its adjusted net loss from $22.6 million in the year-ago period to $15.2 million, or $0.13 per share, which cleared the consensus forecast by $0.04 per share.

For the full fiscal year, C3.ai's revenue rose 6% to $266.8 million as it narrowed its adjusted net loss from $76.7 million to $46.4 million, or $0.42 per share.

Those headline numbers seemed stable, but they probably couldn't justify C3.ai's massive share price gains since the beginning of the year -- which had mainly been driven by the recent market hype regarding AI stocks instead of the actual growth of its business.

Image source: Getty Images.

Even after that post-earnings plunge, C3.ai is still sitting on a year-to-date share price gain of 180%. But it's also trading at a 25% discount to its IPO price and more than 80% below its all-time high from 2020. So is C3.ai an undervalued growth stock right now -- or is it a falling knife?

Its growth has slowed to a crawl

C3.ai develops AI algorithms that can be integrated into an organization's existing software to automate processes, detect fraudulent transactions, and improve employee safety, among other functions. It primarily serves large enterprise customers, but it generates roughly 30% of its revenue from a joint venture with energy giant Baker Hughes (NASDAQ: BKR).

When it went public in 2020, C3.ai initially dazzled the market with its catchy ticker symbol and robust growth. Revenue rose 17% in its fiscal 2021 even as the pandemic disrupted its core markets, and grew 38% in fiscal 2022 as those headwinds slackened.

But over the past year, its growth in revenue and remaining performance obligations (RPO) -- the revenue it expects to recognize from its existing contracts -- slowed to a crawl as companies reined in their spending in light of the macroeconomic headwinds.

Data source: C3.ai. YOY = Year over year. *GAAP basis.

That slowdown was exacerbated by C3.ai's abrupt decision last year to replace its subscription plans with a la carte consumption-based fees. Management asserted that the change was necessary to attract more customers in a tough macro environment, but the new model generates lower and less predictable revenue than its stickier subscription plans.

C3.ai management has a disappointing track record of overpromising and underdelivering. At the end of its fiscal 2022, it forecast that it would grow its revenue by 22% to 25% in fiscal 2023. Instead, it delivered 6% growth. Its joint venture with Baker Hughes is also set to expire in fiscal 2025 -- and there's no guarantee it will be renewed. C3.ai claims it will benefit from the expansion of the AI market with its own "generative AI" applications -- but those services aren't boosting its sales yet.

C3.ai says it expects its revenue to rise by 7% to 11% year over year in the fiscal first quarter and to grow by 11% to 20% for the full year. The average view among analysts is that its revenue will rise by 19% for the full fiscal year as it posts a narrower net loss. That outlook seems stable, but C3.ai's enterprise value of $2.3 billion still looks a bit high at 7 times its projected sales for fiscal 2024. We should also be deeply skeptical of C3.ai's estimates after it broadly missed its own revenue targets for its fiscal 2023.

Its gross margins are still shrinking

C3.ai's adjusted gross margin declined by 7 percentage points year over year to 74% in the fourth quarter of its fiscal 2023. For the fiscal year, its adjusted gross margin shrank by 2 percentage points to 77%.

During the conference call, CFO Juho Parkkinen blamed that "short-term pressure" on a "higher mix" of pilot programs. However, intense competition from other similar AI services -- including those that are already integrated into leading cloud platforms like Amazon Web Services (AWS) and Microsoft Azure -- could also be limiting C3.ai's pricing power and forcing it to launch more promotional pilot programs.

Parkkinen believes C3.ai can offset some of that pressure with "more rigorous expense management," but he still expects the company to post an adjusted operating loss of $50 million to $75 million in fiscal 2024. The midpoint of that forecast ($62.5 million) would only mark a slight improvement from its adjusted operating loss of $68.1 million in fiscal 2023.

It's not the right time to buy C3.ai

C3.ai's sluggish sales growth, its track record of underperforming its own forecasts, and its tendency to chase the latest tech trends (it was originally called C3 Energy, then renamed itself C3 IoT (Internet of Things), then rebranded itself again as C3.ai in 2019) all raise bright red flags. In short, investors should stay far away from this volatile stock -- which has been rising high on the AI hype train, not because it's generating sustainable growth.