Is It Too Late to Buy C3.ai Stock?

C3.ai's (AI 3.02%) stock price jumped 25% on Feb. 29 after the enterprise artificial intelligence (AI) software provider posted its latest earnings report. For the third quarter of fiscal 2024, which ended on Jan. 31, the company's revenue rose 18% year over year to $78.4 million and exceeded analysts' expectations by $2.3 million. Its adjusted net loss widened from $6.2 million to $15.9 million, or $0.13 per share, but still beat the consensus forecast by $0.15.

C3.ai's top-line growth accelerated for the fourth consecutive quarter and challenged the bearish notion that its business was headed off a cliff. But is it too late to chase this stock after its post-earnings pop?

Image source: Getty Images.

What does C3.ai do?

C3.ai develops AI algorithms that can be plugged into an organization's infrastructure to accelerate and automate certain tasks. It mainly serves large enterprise customers across the financial, industrial, and energy sectors -- and generates about 30% of its revenue from a joint venture with the energy giant Baker Hughes.

C3.ai's revenue only rose 6% in fiscal 2023 (which ended on April 30, 2023), compared to its 38% growth in fiscal 2022. That slowdown was caused by:

• Macro headwinds, which drove companies to rein in their software spending.
• Stiff competition from other AI software providers.
• A decision to pivot toward usage-based fees, which generated less consistent revenue than subscription-based fees.

The company made the last change to attract more customers in the challenging macro environment.

Is C3.ai's turnaround plan working?

Over the past year, C3.ai's revenue growth accelerated again as more customers opted to pay its usage-based fees instead of signing up for its stickier subscriptions. But that shift reduced its remaining performance obligations (RPO) -- or the remaining value of its contracts that haven't been recognized as revenue yet -- and squeezed gross margins.

Data source: C3.ai. YOY = year over year. *GAAP basis.

C3.ai previously aimed to turn profitable on a non-GAAP (generally accepted accounting principles) basis in fiscal 2024 but withdrew that guidance in the first quarter in favor of ramping up its investments in new generative AI tools. That was a polarizing decision. The bulls believed C3.ai was shrewdly sacrificing its near-term margins to sow the seeds for longer-term growth, while the bears thought it was merely hopping aboard the generative AI bandwagon to attract more attention.

For now, C3.ai's turnaround strategies seem to be working. A total of 445 customers engaged with its platform in the third quarter, representing 10% growth from the second quarter and 80% growth from a year earlier. Its total number of closed agreements grew 85% year over year, while its number of new pilot programs rose 71%.

C3.ai's growth is stabilizing, but its stock is expensive

For the fourth quarter, C3.ai expects its revenue to rise 13%-19% year over year. For the full year, it anticipates 15%-16% growth -- compared to its prior outlook for 11%-20% growth and the consensus forecast for 15% growth. Analysts expect the company's revenue to rise 19% to $368 million in fiscal 2025.

Based on those expectations, C3.ai's stock doesn't look cheap at 12 times next year's sales. For reference, Microsoft -- which is expected to grow revenue by 15% in fiscal 2024 (which ends this June) and 14% in fiscal 2025 -- trades at 11 times next year's sales but is firmly profitable by GAAP and non-GAAP measures.

C3.ai expects its non-GAAP operating loss to widen from $68.1 million in fiscal 2023 to $115 million-$123 million in fiscal 2024 as it develops and markets new algorithms that can be integrated with generative AI platforms. However, there's also a chance that new generative AI technologies could displace its stand-alone AI algorithms in the future -- so this strategic shift might be a defensive play instead of an offensive one.

The company ended its first quarter with $723 million in cash, cash equivalents, and marketable securities -- but analysts expect it to post net losses of $302 million in fiscal 2024 and $297 million in fiscal 2025. On the bright side, its low debt-to-equity ratio of 0.2 gives it room to raise fresh cash if its coffers run dry.

Lastly, investors should pay attention to C3.ai's joint venture with Baker Hughes. That deal will expire in fiscal 2025 -- and there's no guarantee it will be renewed. The loss of that top customer could result in an abrupt and disastrous slowdown.

There are better AI stocks to buy

C3.ai's stock remains below its initial public offering (IPO) price. Its post-earnings pop might have been fueled by a short squeeze (29% of its shares were being sold short as of Feb. 15) and the broader buying frenzy in AI stocks, instead of any true confidence in its future growth. For now, I believe investors should stick with better AI stocks and steer clear of C3.ai.