After the market closed on Wednesday, C3.ai (AI 3.02%) reported results for the second quarter of its current fiscal year, which ended Oct. 31. Despite posting a smaller-than-expected loss in the quarter, sales came in lower than anticipated -- and the stock fell roughly 8% in after-hours trading.
The company posted a non-GAAP (adjusted) loss of $0.13 per share on sales of $73.2 million in fiscal Q2. While the company's bottom line came in significantly better than the per-share loss of $0.18 targeted by the average analyst estimate, sales in the period fell short of Wall Street's target for revenue of $74.3 million.
If you're thinking about investing in C3.ai, take a look at this infographic breaking down the business's second-quarter performance and read on for a verdict on whether the artificial intelligence (AI) stock is a smart buy right now.
Image source: The Motley Fool.
What do C3.ai's Q2 results mean for investors?
While sales were up 17.3% year over year in the company's second quarter, they were up just 1.2% on a sequential quarterly basis. And despite solid annual sales growth in the quarter, C3's gross profit actually slipped in the period.
Due to new deals and product releases that carry a higher cost of revenue and discounted pilot pricing, the company's adjusted gross margin has been falling. The company posted an adjusted gross profit margin of 81% in last year's first quarter, and it recorded a margin of 69% in its two most recently reported quarters.
Management expects the gross margin to remain pressured in the near term, but it looks like sales will continue to climb in the remaining quarters of the company's current fiscal year.
| Outlook Period | Revenue Forecast | Adjusted Operating Loss Forecast |
|---|---|---|
| Q3 2024 | Between $74 million and $78 million | Between $40 million and $46 million |
| Full-year 2024 | Between $295 million and $320 million | Between $115 million and $135 million |
Data source: C3.ai.
At the midpoint of the target range, sales are projected to grow roughly 14% year over year in fiscal Q3. Meanwhile, the midpoint of the company's full-year guidance range calls for revenue growth of roughly 15%.
But investors should be cautious about expecting this level of momentum to continue further out. C3.ai posted relatively weak performance last year, so it's starting from a favorable basis of comparison when it comes to year-over-year growth.
Amid the broader backdrop of surging demand for AI services that's shaped performance for some tech companies this year, C3's sequential quarterly sales growth and guidance looks relatively muted.
While it's possible that the company's sales growth will accelerate in the near term, some metrics suggest that uneven performance may be on the horizon. Take a look at the following chart, which tracks C3.ai's remaining performance obligations (RPO).
Data source: C3.ai. Chart by author.
Remaining performance obligations are services that have been contracted for but have not yet been completed and recorded as revenue. As the chart shows, C3's remaining performance obligations have been on a sustained downward trend. Along with recent sales performance, the RPO trend suggests that the company is not seeing a huge surge in demand for its AI services.
C3.ai stock is still too expensive to be a buy
Despite some volatile trading swings, C3.ai has been one of this year's hottest stocks. While it's certainly possible that the company will continue crushing the market, I think the company's valuation remains unreasonably stretched.
AI looks poised to deliver revolutionary technology shifts and spur incredible performance for top players in the space. But thus far, it's not clear that C3.ai is really scoring big wins in the rapidly unfolding trend. On the other hand, C3 stock's incredible gains this year seem rooted in the general explosion of interest taking place around artificial intelligence.
AI PS Ratio (Forward) data by YCharts
Trading at roughly 11 times this year's expected sales, C3.ai looks too expensive given its recent business performance and near-term growth outlook. Until signs of more meaningful AI wins emerge for the company, I think investors should seek out other plays in the artificial intelligence space.
