C3.ai (AI 0.15%) posted its latest earnings report on Wednesday, May 29. For the fourth quarter of fiscal 2024, which ended on April 30, the enterprise AI software company's revenue rose 20% year over year to $87 million and exceeded analysts' expectations by $2 million. It narrowed its adjusted net loss from $15 million to $14 million, or $0.11 per share, which also cleared the consensus forecast by $0.19.

The stock rallied after that earnings beat, but it still trades nearly 40% below its initial public offering price and more than 85% below its all-time high. Should investors buy it as a turnaround play right now?

Two robots dressed in business suits in an office.

Image source: Getty Images.

Another quarter of accelerating growth

C3.ai develops AI algorithms that can be plugged into an organization's existing software to accelerate, automate, and optimize certain tasks. They can also be used to detect fraud and improve employee safety standards. The company primarily serves large energy, industrial, and government customers.

Revenue rose 38% in fiscal 2022 but grew just 6% in fiscal 2023. That deceleration was caused by macro headwinds that drove its clients to rein in their software spending; stiff competition from similar AI and automation companies; and an introduction of consumption-based plans that generated less-consistent revenue than its subscriptions. It pivoted toward those consumption-based tiers to gain more customers in a tougher environment.

I was initially skeptical of C3.ai's abrupt shift in its pricing strategy, but it seems to have paid off. Over the past year, its year-over-year revenue growth accelerated as its rising customer engagement rates offset its declining average selling prices (ASP). Its adjusted gross margins also stabilized sequentially throughout the year.

Metric

Q4 2023

Q1 2024

Q2 2024

Q3 2024

Q4 2024

Revenue growth (YOY)

0%

11%

17%

18%

20%

Customer engagement growth (YOY)

35%

50%

81%

80%

70%

ASP growth (YOY)

(61%)

(47%)

(19%)

(36%)

(23%)

Adjusted gross margin

74%

69%

69%

70%

70%

Data source: C3.ai. YOY = Year over year.

For the full year, revenue rose 16% to $311 million, its number of customer agreements grew 52% to 191, and its customer engagement rate increased 70%. For fiscal 2025, it expects its revenue to rise 19% to 27% --- which tops the consensus forecast for 19% growth. CEO Tom Siebel attributed that rosy outlook to its robust growth in federal revenue and a "staggering" interest in generative AI applications.

But it still has some glaring weaknesses

C3.ai's top-line growth seems to be stabilizing. But with an enterprise value of $2.2 billion, its stock isn't a screaming bargain at 6 times its fiscal 2025 sales. It also still generates over 30% of its revenue from a joint venture with the energy giant Baker Hughes, and it needs to renew that crucial deal before it expires at the end of fiscal 2025.

C3.ai also lacks a meaningful path toward breaking even. It originally aimed to turn profitable on an adjusted basis in fiscal 2024, but it unexpectedly abandoned that goal at the beginning of the year in favor of ramping up its research-and-development and marketing investments in its new tools for the generative AI market.

For fiscal 2025, C3.ai expects to post an adjusted operating loss of $95 million to $125 million, compared to its operating loss of $95 million in fiscal 2024. That outlook is disappointing, but the company won't go bankrupt anytime soon. It still had $750 million in cash, cash equivalents, and marketable securities at the end of the year, and its low debt-to-equity ratio of 0.2 gives it some breathing room to take on more debt.

That said, C3.ai -- along with many of the market's other unprofitable tech companies -- will remain under pressure as long as interest rates stay elevated. It also isn't that difficult to find similar companies with more attractive growth rates and valuations. For example, the automation software provider UiPath -- which is generating comparable revenue growth but is consistently profitable on an adjusted basis -- trades at just 5 times this year's sales.

Is it the right time to buy C3.ai stock?

C3.ai is taking some steps in the right direction, but it still has severe customer concentration issues, continues to rack up steep losses, and isn't really cheap relative to its growth rates or industry peers. So for now, I'd stay away from the stock and invest in other AI companies that have already addressed those fundamental challenges.