A relatively attractive valuation and improving growth prospects make buying this AI stock a no-brainer.
The past six months have been terrible for C3.ai (AI 6.82%) investors as shares of the enterprise AI software provider have fallen sharply after a solid start to 2024. The stock price is down 42% since hitting a 52-week high on Feb. 29. The company’s latest quarterly results only added to the bearish sentiment around the stock.
C3.ai released fiscal 2025 first-quarter results (for the three months ended July 31) on Sept. 4. Investors pressed the panic button following the company’s report even though it reported better-than-expected numbers. What’s going on here? More importantly, could this sharp pullback in the company’s stock price in recent months be a buying opportunity for investors looking to capitalize on the growing demand for artificial intelligence (AI) software?
C3.ai’s growth accelerated, but it’s coming at a cost
C3.ai reported fiscal Q1 revenue of $87.2 million, an increase of 21% from the same quarter last year when its top line increased only 11%. This was the fifth consecutive quarter in which the company’s revenue growth accelerated.
Q1’s top line exceeded the analyst consensus estimate of $86.9 million. Additionally, the company’s adjusted loss dropped to $0.05 per share from $0.09 per share in the year-ago period. Wall Street anticipated the company would deliver a non-GAAP (adjusted) loss of $0.13 per share.
The slower-than-expected growth in the company’s subscription revenue, which increased 20% year over year to $73.5 million but was lower than the consensus estimate of $79.1 million, was one of the reasons why the market reacted negatively to C3.ai’s results. Additionally, the company expects its non-GAAP loss from operations to jump from $16.6 million in the previous quarter to $30.7 million in the current quarter at the midpoint of its guidance range.
Also, that would be higher than the $25 million non-GAAP loss it reported in the same period last year. C3.ai management pointed out on the latest earnings conference call that its increased losses are a result of its efforts to land more business, as well as its focus on enhancing its sales force. According to CFO Hitesh Lath:
We continue to expect short-term pressure on our gross margins due to [a] higher mix of pilots, which carry a greater cost of revenue during the pilot phase of the customer life cycle. We also expect short-term pressure on our operating margin due to additional investments we are making in our business, including in our sales force, research and development, and marketing spend.
Lath added that C3.ai will be cash-flow negative in the current quarter and the next one. However, he forecasts that the company will become free-cash-flow positive in Q4, and will remain free-cash-flow positive for the full fiscal year. Another thing worth noting here is that C3.ai’s revenue growth rate now exceeds the growth rate of its operating expenses.
AI Revenue (Quarterly) data by YCharts
The reason why this is happening is that C3.ai’s “cost of goods sold is substantially less than our cost of generating revenue,” according to CEO Tom Siebel. Management believes that its revenue growth rates are likely to exceed expense growth rates even as C3.ai continues to focus on winning a larger share of the fast-growing enterprise AI software market.
A look at the bigger picture
The good part is that C3.ai’s focus on landing more business is paying off. The company struck 71 customer agreements last quarter, up from 32 in the year-ago period. It is also worth noting that it is now landing bigger deals with clients. For example, it struck two deals valued between $5 million and $10 million last quarter as compared to none in the same period last year. The number of deals worth $1 million to $5 million also increased from nine last year to 11 last quarter.
The improved deal activity explains why C3.ai expects another quarter of acceleration in its top line in Q2. It expects revenue of $88.6 million to $93.6 million in the current quarter, which would translate into year-over-year growth of roughly 24.5% at the midpoint.
C3.ai reiterated its full-year revenue guidance range of $370 million to $395 million, which would be a 23% increase over last year. But it won’t be surprising to see its annual revenue coming in at the higher end of that guidance range if its deal activity continues to improve. The company’s generative AI offerings are gaining traction among both government and commercial customers.
Moreover, the generative AI software market is forecasted to generate $52 billion in annual revenue in 2028 as compared to $5.1 billion last year. So, there is a good chance that the company will be able to sustain its improving growth levels in the long run.
With C3.ai stock trading at less than 8 times sales (a major discount to peer Palantir‘s price-to-sales ratio of 29), investors looking for an AI stock that’s not too expensive and seems capable of delivering healthy long-term gains can consider using its pullback to buy the stock as it could become a winner in the long run.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
