The excitement surrounding C3.ai (AI +1.73%) stock has been waning in recent weeks with shares giving back some of the gains they have generated thus far in 2023. But year to date, it's still up over 200%.
The major test for C3.ai will be how well the business does in the current fiscal year now that artificial intelligence (AI) is at the forefront of many investors' minds, and companies of all kinds are showing an interest in it. Here's why fiscal 2024 could be a big year for C3.ai.
C3.ai is guiding for adjusted profitability in fiscal 2024
By the end of fiscal 2024 (which ends on April 30, 2024), C3.ai plans to achieve adjusted profitability, and to be doing so sustainably (i.e., not just due to a one-time gain or some other nonrecurring income item).
While this would not be true profitability based on generally accepted accounting principles (GAAP), it would still mean that C3.ai is improving its financials. In its fiscal 2023 fourth-quarter report, C3.ai's non-GAAP net loss was $15.2 million, down from the $22.6 million loss it incurred in the prior-year period. The main difference between its GAAP and non-GAAP losses relates to stock-based compensation expense, which totaled just under $50 million during the period.
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True accounting profitability likely won't be attainable this fiscal year. But even if C3.ai's quarterly non-GAAP loss shrinks and can get to breakeven, that will be a big accomplishment for the business and will help to demonstrate to investors that it is on the right track.
Demand has been heating up
C3.ai cautions about not knowing the size of the addressable market for its generative AI applications. While it has closed agreements on these solutions recently, and it has a "substantial pipeline" for more opportunities, the company notes "it is difficult to estimate the size of the addressable market for these solutions, but it appears extraordinarily large."
This uncertainty can be part of the reason its guidance may appear soft with C3.ai projecting fiscal 2024 revenue to be no higher than $320 million, which would represent a 20% increase over the previous year. It's still a decent boost and much higher than fiscal 2023's growth rate of just 6%, but perhaps it's not as much as investors have been hoping for given the hype around AI.
Another positive development for C3.ai has been that customers are executing agreements quicker than before. The company says the average sales cycle last quarter was 3.7 months, whereas in the prior-year period, the average was five months. A sales cycle measures how quickly a sales rep can convert a lead into a customer.
Between having a larger pipeline and customers signing deals more rapidly, there should be some robust growth in the current fiscal year. But C3.ai may not have a strong enough grasp on its full opportunity to be able to confidently put out an aggressive forecast. That's not necessarily a bad thing, however, because if the forecast is conservative and proves easy to beat, that should generate even more bullishness around the stock.
Should you buy C3.ai stock?
There's risk with C3.ai in that it still needs to prove it's the real deal in AI. Now that opportunities are pouring in and with other businesses peddling AI-related solutions, it'll be up to the company to prove its applications and offerings can meet the needs of its customers the best.
If you're willing to take on that risk and hold onto the tech stock during what may end up being a make-or-break year for C3.ai, there could be some massive upside for you.
But given that sales of $72.4 million in its most recent quarter were flat year over year, I would wait for at least another earnings report or two to see whether the company's outlook is indeed conservative, or if demand is not shaping up as expected. C3.ai stock shows promise, but it's still too early to tell if it'll be a big winner in AI.
