C3.ai (AI 1.23%) stock has been on a roller-coaster ride in 2023, rising impressively in the first half of the year before pulling back significantly over the past couple of months as it became evident that the pure-play provider of enterprise artificial intelligence (AI) software is not making the most of the huge end-market opportunity on offer.
Shares of C3.ai are down 44% since the beginning of August. The company's fiscal 2024 first-quarter results, which were released last month, didn't help matters either, as its growth wasn't solid enough. Moreover, C3.ai doesn't expect to deliver a profit in the new fiscal year, which it was anticipating earlier, strengthening the bearish argument against investing in the stock considering its steep valuation.
NYSE: AI
Key Data Points
Let's take a closer look at the reasons why an investment in C3.ai may not be a good idea right now before moving on to the potential reasons why it could go on a bull run in the future.
C3.ai isn't growing fast enough
C3.ai stock is up 120% in 2023 despite its recent pullback. But that surge has mostly been driven by the growing hype around AI and not by the company's actual performance. For instance, the company's fiscal Q1 revenue (for the three months ended July 31, 2022) increased just 11% from the prior-year period. That's quite modest for a stock trading at a rich 10 times sales.
AI PS Ratio data by YCharts
The above chart shows that C3.ai's revenue growth has flatlined in the past year. Additionally, C3.ai's guidance for the full year doesn't justify the valuation. The company anticipates fiscal 2024 revenue to land between $295 million and $320 million. At the midpoint, that would be a 15% increase over fiscal 2023 revenue of $267 million.
Wall Street analysts are pointing out that the company isn't benefiting from the growing adoption of AI applications. That's not surprising, as the market for AI software is expected to grow at an annual rate of 23% over the next decade. Therefore C3.ai is underperforming the industry in which it operates. This could continue to weigh on the stock given its rich sales multiple, which means that bears could continue to have an upper hand, and shares of this AI specialist could fall further.
But at the same time, there are a few silver linings that could make C3.ai an attractive long-term bet if it keeps falling and becomes available at a cheaper valuation.
The bulls shouldn't lose hope just yet
A key reason why C3.ai's growth hasn't been good enough of late is that it is currently in the middle of a business model transition. The company started charging customers for its services on a consumption-based model from the beginning of fiscal 2023. It used to charge them on a subscription basis earlier, which gave it greater revenue visibility since it was able to lock them in for longer contracts.
But in a pay-as-you-go model, C3.ai gets money only when customers are using its services -- though the company is now able to close deals faster, as customers don't need to enter into negotiations. Management estimates that the consumption revenue model will take another three quarters before it starts scaling up and drives stronger growth for C3.ai, and the company's fiscal 2024 revenue guidance points toward the same.
C3.ai's revenue increased just 5% in fiscal 2023, so its forecast for the current year points toward much stronger growth. More importantly, C3.ai points out that its sales pipeline has been improving at a nice clip post the transition. On its September earnings conference call, CEO Tom Siebel said that C3.ai has "closed 12 generative AI agreements and has a pipeline of more than 140 qualified generative -- C3 Generative AI enterprise opportunities."
The company is witnessing growth in government-related business as well, with federal bookings increasing 39% year over year last quarter. All this probably explains why analysts are anticipating an acceleration in C3.ai's growth over the next couple of fiscal years.
AI Revenue Estimates for Current Fiscal Year data by YCharts
So C3.ai could eventually regain its mojo once its growth kicks into a higher gear. Such a possibility cannot be ruled out, considering that the company claims to be sitting on an addressable market that could be worth $791 billion by 2026.
That's why investors looking to buy an AI stock should keep C3.ai on their radars and consider accumulating it once it becomes cheaper and its pace of growth improves.
