Investors in enterprise software company C3.ai (AI 3.02%) should hope that it can become the next Palantir Technologies (PLTR 3.73%). If it were to do so, it would mean multiplying in size, having a niche in government operations, and growing its presence in the private sector.
But how likely is that to happen?
In late February, C3.ai reported its results for the fiscal quarter that ended Jan. 31 and gave investors a look at its current trajectory. There were good and bad aspects, and those expecting big things out of C3.ai may have some things to consider. One of these things is whether it could be the next Palantir.
C3.ai's revenue growth is accelerating, and bookings are diversified
Palantir and C3.ai have some similarities. Both build custom software applications for government and commercial clients. These applications use artificial intelligence (AI) to analyze data, identify trends, and accomplish tasks. The uses can range from optimizing supply chains to identifying fraud. C3.ai's roots are in the energy industry, and its business was heavily concentrated in that sector due to an extensive distribution and customer relationship with Baker Hughes.
To its credit, though, C3.ai has evolved quite a bit over the past year. It shifted its business model from subscription billing to consumption-based. It's also shifted away from the oil & gas industry, with bookings steadily shifting to other industries like government and public works, defense and aerospace, manufacturing, and agriculture.
C3.ai continues to work with Baker Hughes on a multi-year partnership that expires in April 2025. Their contract specifies revenue commitments of $125 million for the fiscal year ending April 25, so energy bookings should rebound. Bookings may fluctuate across industries, and investors will want to see whether Baker Hughes will renew its partnership with C3.ai next year. Nonetheless, it's good to see the company develop new business channels outside the energy sector.
Image source: C3.ai
Revenue grew 18% year over year in the most recent quarter, a continued, albeit slight, acceleration from the previous quarter. This uptick in growth began a year ago as the new billing model started gaining traction.
C3.ai's guidance was lacking, and stock-based compensation is too high
The accelerating revenue growth was a promising trend, which makes the company's full-year guidance somewhat disappointing. Management is guiding between 13% and 19% revenue growth in Q4 of its fiscal year 2024. That means revenue growth is barely accelerating (if at all) at the high end of guidance and slowing down again at the low end.
Additionally, the company is using stock-based compensation to reduce its cash burn. Paying employees in part with stock instead of purely cash salaries helps conserve cash for the business. That's a common strategy for growing companies, but the problem is just how many shares C3.ai is dishing out. Over the past 12 months, the company has done $296 million in total revenue while awarding $207 million in stock-based compensation.
That's a ton of stock. This steadily dilutes existing shareholders, making each share worth a smaller portion of the business.
AI Revenue (TTM) data by YCharts.
Since the company went public, the number of shares outstanding has increased by 64%. C3.ai is not nearly profitable -- it burned $45 million last quarter. Analysts believe GAAP earnings will come in the company's fiscal 2027. How much higher will stock-based compensation take the count of shares outstanding by then?
Palantir initially had a problem with high stock-based compensation, but it is now GAAP profitable and initiated a stock buyback program to reduce the share count and increase earnings per share.
Is C3.ai the next Palantir?
C3.ai has promise, but not every AI company will be a home run. Without a solid underlying business and a good management team, the investment returns such companies deliver won't be what investors hope for. That's not to say C3.ai can't get there, but it isn't there yet.
Palantir remains a fundamentally superior business, and investors are better off opting for its stock instead. Sometimes, the next great thing is simply the stock that was great in the first place.
