Could C3.ai Become the Next Microsoft?

C3.ai (AI 3.24%) attracted lots of attention with its initial public offering (IPO) nearly 3 1/2 years ago. The enterprise artificial intelligence (AI) software developer was growing rapidly, had a catchy ticker symbol, and was led by Tom Siebel -- an industry veteran who had sold his previous company Siebel Systems to Oracle for $5.8 billion in 2006.

C3.ai went public at $42 on Dec. 9, 2020, and its stock opened at $100 a share before skyrocketing to a record high of $177.47 less than two weeks later. Those gains were amplified by the buying frenzy in growth and meme stocks during the pandemic.

Image source: Getty Images.

But today, C3.ai's stock trades at about $20. The bulls rushed for the exits as the company's growth cooled and it continued racking up steep losses. Rising interest rates also popped its bubbly valuations.

At its peak, C3.ai's enterprise reached $16.7 billion -- or 91 times the revenue it would actually generate in fiscal 2021 (which ended in April 2021). Today, it's only worth $2.5 billion -- or seven times its projected revenue for fiscal 2025.

That's a painful decline, but could C3.ai keep growing and evolve into a tech titan like Microsoft (MSFT 1.99%) over the next few decades? Let's take a fresh look at its long-term tailwinds and headwinds to decide.

What does C3.ai do?

C3.ai develops AI algorithms that can automate, accelerate, and optimize certain tasks for large enterprise customers and government clients. These algorithms can be directly plugged into an organization's existing software infrastructure.

The company initially provided its tools as subscription-based services. But in 2022, it pivoted toward usage-based fees to attract more customers. It notably generates about 30% of its revenue from a joint venture with the energy giant Baker Hughes, but that deal will expire in fiscal 2025 and hasn't yet been renewed.

From fiscal 2019 to fiscal 2023, C3.ai's revenue grew at a compound annual growth rate (CAGR) of 31%. However, its growth decelerated in fiscal 2021 as the pandemic disrupted the energy and industrial markets and slowed again in fiscal 2023 as economic headwinds drove companies to rein in their software spending. That slowdown was exacerbated by the company's abrupt shift from subscriptions to usage-based fees.

Data source: C3.ai.

But from fiscal 2023 to fiscal 2026, analysts expect the company's revenue to rise at a CAGR of 19% as the macro environment improves. C3.ai also expects its development of new algorithms for generative AI platforms to boost its near-term revenue growth.

Unfortunately, C3.ai still isn't anywhere close to breaking even on either a generally accepted accounting principles (GAAP) basis or non-GAAP basis. The company originally planned to turn profitable on a non-GAAP basis in fiscal 2024, but it ditched that goal in the first quarter of the year to focus on the development and marketing of its generative AI algorithms.

C3.ai's modest revenue growth, customer concentration issues, and steep losses have combined to make it an unappealing stock to own as interest rates rise. That's why it's still trading more than 50% below its IPO value, and probably why its insiders sold more than six times as many shares as they bought over the past 12 months.

Why C3.ai won't become the next Microsoft

C3.ai's projected revenue of $308 million in fiscal 2024 would be comparable to Microsoft's revenue of $346 million in fiscal 1987 (which ended in June 1987). But from fiscal 1987 to fiscal 2024, Microsoft's revenue grew at a CAGR of 19%, to $211.9 billion.

Achieving that growth over nearly four decades wasn't an easy task. But Microsoft evolved by expanding its consumer-facing Windows and Office products, entering the gaming and PC hardware markets, acquiring more companies, and rolling out new cloud, mobile, and AI services. Today, most of Microsoft's growth is driven by its cloud and AI services.

C3.ai isn't a consumer-facing company like Microsoft. It serves a niche market with its enterprise AI algorithms, faces stiff competition from other AI software companies, and hasn't even proven its business model is sustainable.

For C3.ai to be meaningfully compared to tech titans like Microsoft, it will need to break out of its niche and expand its ecosystem. Instead of wondering if C3.ai will become a trillion-dollar company, investors should see if it can generate its first billion dollars in annual revenue within the next decade.