C3.ai's (AI 3.02%) stock market rally has come to a screeching halt after a terrific start to the year. Shares of the artificial intelligence (AI) software provider have pulled back 41% in the past three months.
It looks like the stock will remain under pressure following the release of the company's latest earnings report. C3.ai released its fiscal 2024 first-quarter (ended July 31) results on Sept. 6, and investors were quick to press the panic button as the company now expects to post a bigger loss this year. The company was earlier forecasting an adjusted profit in the fourth quarter of the fiscal year, but it doesn't expect to hit that target anymore, instead planning to invest more money in generative AI offerings.
Let's take a closer look at the latest numbers and see if savvy investors should consider buying this AI stock following its latest drop.
C3.ai's numbers show that it has a lot of work to do
C3.ai reported fiscal Q1 revenue of $72.4 million -- up 11% year over year -- which was at the higher end of its guidance range of $70.0 million to $72.5 million. However, that was substantially slower than the 25% growth C3.ai reported in the prior-year period. The company's non-GAAP net loss per share also fell 25% to $0.09.
Though those headline figures topped the analyst consensus, guidance fell short of expectations. Wall Street was looking for $78 million of revenue in the current quarter, but management guided for $72.0 million to $76.5 million. The midpoint of that range represents a 19% increase from the year-ago quarter, indicating that top-line growth is set to accelerate.
But there were a few red flags in the latest report that investors cannot ignore. For instance, the company exited the quarter with remaining performance obligations (RPO) worth $335 million. That was down from $458 million in the prior-year period. As RPO measures the total future value of unfulfilled contracts that a company has signed, a drop in this measure points toward a weaker revenue pipeline.
One reason why that's the case is because C3.ai started charging its customers based on a pay-as-you-go model a year ago. It previously used a subscription-based pricing model, which gave it better revenue visibility since it was able to lock customers into long-term contracts. But C3.ai management felt that switching to a consumption-based model would help it close deals faster since customers won't have to enter into negotiations.
However, that switch doesn't seem to be having the desired effect, at least not yet. C3.ai finished last quarter with 32 deals, up from 31 a year ago. The average contract value, on the other hand, declined from $1.4 million to $0.8 million over the same period. These numbers indicate C3.ai isn't getting enough traction in the enterprise AI software market right now.
The stock's valuation remains expensive
Even though there has been a sharp pullback in C3.ai's stock price of late, it remains richly valued at 11.2 times sales. Its top-line growth isn't nearly strong enough to justify that multiple. The company's full-year fiscal 2024 guidance for $295 million to $320 million of revenue would mark 15% growth (at the midpoint) and a nice improvement from the 5.6% growth in fiscal 2023. But the slowdown in deal-making activity seen last quarter could keep the company from hitting its targets.
At the same time, C3.ai now sees its adjusted operating loss falling between $70 million and $100 million for the year, a downward revision from the prior outlook of $50 million to $75 million. Management says that the higher loss guidance is the result of a "decision to invest in lead generation, branding, market awareness, and customer success related to our Generative AI solutions."
Those investments in fast-growing areas such as generative AI may lead to an acceleration in growth, which is what analysts are forecasting as you can see below:
Data by YCharts.
But then, investors may want to wait for that growth to materialize before buying this AI stock given its expensive valuation and the challenges it's facing.
