C3.ai (AI 0.71%) stock has set the market ablaze in 2023 with a massive return of 328% year to date, but a closer look at the company's business suggests the stock may have gotten ahead of itself thanks to the hype around artificial intelligence (AI).
Multiple red flags have been raised about C3.ai this year. From the company's sluggish growth and customer concentration to allegations of accounting fraud and its prohibitively high valuation, there are a number of reasons why investors may want to stay away from this high-flying stock right now.
C3.ai stock is trading at a whopping 18 times sales and delivered revenue growth of just 5.6% to $267 million in the recently concluded fiscal 2023. Additionally, the company gets nearly a third of its revenue from Baker Hughes. This relationship formed the basis of an attack by short-seller Kerrisdale Capital, which accused C3.ai of accounting irregularities a couple of months ago.
C3.ai has denied those allegations, and investors have continued buying this enterprise AI software provider hand over fist as they look to cash in on the AI hype. Let's look at two reasons why investors continue to put their faith in this AI stock.
1. C3.ai's growth is accelerating
I have already pointed out that C3.ai ended the previous fiscal year with tepid growth, but things are about to change in the current fiscal year.
The company expects to deliver $71.2 million in revenue in the current quarter, which would be a 9% jump over the year-ago period. More importantly, C3.ai expects growth to accelerate as the year progresses. This is evident from the company's full-year revenue forecast of $295 million to $320 million, which would be a 15% increase over fiscal 2023 at the midpoint.
It cannot be denied that C3.ai needs to deliver much faster growth to justify its rich multiple, and the good part is that the company could eventually deliver on that front as well. Analysts are expecting C3.ai's growth to continue picking up the pace over the next couple of fiscal years.
Data by YCharts.
What's more, the company is expected to become profitable on a non-GAAP (adjusted) basis in fiscal 2025.
Data by YCharts.
Consensus estimates suggest that C3.ai could clock handsome annual bottom-line growth of 50% for the next five years. The stronger growth picture can alleviate some of the concerns around the stock's high valuation, and this brings us to the reason why C3.ai could indeed deliver faster growth in the coming years.
2. The business model switch is working
C3.ai reported poor growth in fiscal 2023 because of a change in the company's business model from a subscription-based one to a consumption-based one. The switch was announced in August last year, and C3.ai management pointed out on its latest earnings conference call that it expects "flatness and somewhat of a decline in revenue during the transition with an acceleration as consumption starts to have a meaningful portion of our in-quarter revenue."
More importantly, the company anticipates higher growth rates in the second half of the current fiscal year than the first half as its consumption-based business model starts gaining critical mass. That won't be surprising as C3.ai is now winning more deals by moving to a consumption-based model, which doesn't require customers to engage in protracted negotiations or lock them into long-term contracts.
Customers can simply pay for C3.ai's services as they use them, thereby lowering the entry barrier for anyone looking to use the company's AI enterprise software solutions. The ease with which customers can now access C3.ai's offerings explains why the company struck 43 customer agreements last quarter, a big jump of 59% over the year-ago period. Even better, C3.ai's qualified opportunities in its sales pipeline, which it expects to close in the next 12 months, have more than doubled in the past year.
C3.ai is currently in the second phase of its transition, during which its consumption-based model will start gaining traction with new customer deals. In the third phase, which begins after a year, the company sees a sharp improvement in revenue growth from the consumption model as a significant chunk of customers are expected to have opted for this model by then.
As such, C3.ai seems to be pulling the right strings to ensure it can make the most of the $791 billion addressable revenue opportunity it sees in the AI software market by 2026, based on IDC's estimates. Thanks to these positive trends, investors could enjoy even more upside, both this year and beyond.
