C3.ai (AI 3.02%) has been soaring this year, quadrupling in value as the hype around artificial intelligence (AI) has sent the stock to new heights. But investors were a little bit disappointed with the company's guidance as, despite all the company's AI tools and solutions, management was forecasting what many thought was a modest growth rate of 15% for fiscal 2024. But a recent interview with CEO Tom Siebel seems to suggest that the lowered expectations may have been a strategic decision.
The company anticipates much more growth ahead
In a recent interview with Barron's, Siebel acknowledged that he sees much more growth ahead for the business. He says the stock "has been reset to a reasonable level," and that "we're now in position to beat-and-raise, beat-and-raise and beat-and-raise."
By not declaring outright that C3.ai will generate higher growth, Siebel set the bar low. And Wall Street loves a solid earnings beat. By not showing analysts all of the company's cards, Siebel has taken some of the pressure off C3.ai in upcoming quarters.
All in all, it's not a bad move, and one that can set the business up for success. Often, companies feel pressure to make the numbers, potentially cutting corners along the way as they focus too much on the short term.
C3.ai has averaged 20% growth since going public
The danger for investors, however, is in reading too much into the CEO's words. C3.ai, despite offering AI solutions to a variety of industries, struggled to generate consistent growth:
AI Revenue (Quarterly YoY Growth) data by YCharts
C3.ai's sales were flat last quarter, at $72.4 million for the period ending April 30. And the period before that, the company's sales were down 4%, totaling just $66.7 million.
Despite offering more than 40 different AI applications, including cash management, law enforcement, demand forecasting, and many others, C3.ai hasn't had a very impressive growth rate despite the company still being in its early growth stages.
The emergence of chatbots and AI becoming more prevalent could put the company's AI solutions on the radars of more customers, but that doesn't appear to be the case just yet.
Revenue growth may not be the most important metric for investors
Strong sales numbers often capture the attention of investors, but what is perhaps even more important is operating cash flow. If a business isn't generating cash from its day-to-day operations, it may not be able to afford to pursue all the growth opportunities it can.
AI Cash from Operations (Quarterly) data by YCharts
Last quarter, C3.ai's operating cash flow was positive. However, the company's stock-based compensation totaled $48 million. If those expenses had been paid in cash rather than stock, C3.ai's business would still be burning through cash.C3.ai still has a long way to go in proving that it can generate positive cash flow without relying on stock-based expenses.
Does a potentially soft guidance make C3.ai a good stock to buy?
C3.ai may be able to outperform its internal expectations, but ultimately, analysts will set their own expectations. And so even if the company beats its own expectations, that may not necessarily be enough to generate bullishness in the stock.
Weaker economic conditions this year certainly don't bode well for C3.ai, as businesses could cut back on spending. Ultimately, until C3.ai can prove it can get back to generating strong growth in excess of 20%, I'd continue to take a wait-and-see approach with the tech stock because while it has been a hot buy this year, the results haven't been there to back up its gains.
