C3.ai's (NYSE: AI) stock fell 8% on Sept. 5 after it posted its latest earnings report. For the first quarter of fiscal 2025, which ended on July 31, the enterprise artificial intelligence (AI) software company's revenue rose 21% year over year to $87.2 million and exceeded analysts' estimates by $0.3 million. It narrowed its adjusted net loss from $11 million to $6.9 million, or $0.05 per share, which also cleared the consensus forecast by $0.26.
Those growth rates seemed healthy, but its decelerating subscription growth and soft guidance rattled the bulls. Let's review those challenges and see if it's the right time to buy or sell C3.ai's stock while it's still trading about 50% below its IPO price.
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Another quarter of accelerating revenue growth
C3.ai develops AI algorithms that can be plugged into an organization's existing software infrastructure to accelerate, optimize, and automate certain tasks. It also provides these algorithms as stand-alone services. It mainly serves large customers across the energy, industrial, financial, and government sectors.
It generates most of its revenue from its subscriptions, but it launched a new consumption-based pricing model in 2022. It insists the shift was necessary to attract more customers as the macro headwinds drove companies to rein in their spending, but it also cannibalized its subscriptions, throttled its remaining performance obligations (RPO, or the value of its remaining contracts that have yet to be booked as revenue), and reduced its average selling price (ASP) for each service.
The bulls expected C3.ai's growth in subscriptions to accelerate alongside its consumption-based fees as the macro environment stabilized. But in the first quarter, its growth in subscription revenue actually decelerated -- ending a five-quarter streak of accelerating growth -- as its RPO fell at its steepest rate in more than a year. That slowdown was mainly caused by the sluggish growth of its commercial market offsetting its healthier growth of its public sector market.
Metric | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 |
|---|---|---|---|---|---|
Total revenue growth (YOY) | 11% | 17% | 18% | 20% | 21% |
Subscription revenue growth (YOY) | 8% | 12% | 23% | 41% | 20% |
RPO* growth (YOY) | (27%) | (27%) | (29%) | (36%) | (39%) |
ASP growth (YOY) | (47%) | (19%) | (36%) | (23%) | (13%) |
Adjusted gross margin | 69% | 69% | 70% | 70% | 70% |
Data source: C3.ai. YOY = Year-over-year. *GAAP basis.
On the bright side, C3.ai's revenue growth accelerated for the sixth consecutive quarter, and it expects to maintain that momentum with 21%-28% growth in the second quarter. It also expects its adjusted gross margin to hold steady at 70%.
However, the company didn't raise its previous full-year revenue guidance for 19%-27% growth. The midpoint of that forecast roughly matched the consensus forecast for 23% growth, but investors were probably expecting it to boost that outlook to reflect the aggressive expansion of its services for the generative AI market.
Investors should recall that C3.ai once aimed to turn profitable on an adjusted basis in fiscal 2024, yet it abandoned that goal a year ago to ramp up research and development and marketing investments in its new generative AI tools. Those investments don't seem to be moving the needle and boosting its revenues yet, so they're simply crushing its near-term operating margins.
It hasn't proven its business model is sustainable yet
Analysts expect C3.ai's revenue to grow at a compound annual growth rate of 20% from fiscal 2024 to fiscal 2027. With an enterprise value of $2.2 billion, it looks reasonably valued at less than 6 times this year's sales.
But analysts also expect C3.ai to stay unprofitable on a generally accepted accounting basis (GAAP) for the foreseeable future. They expect its annual GAAP net loss to widen from $280 million in fiscal 2024 to $281 million in fiscal 2027.
To make matters worse, C3.ai generated more than a third of its revenue from a long-term joint venture with the energy giant Baker Hughes in fiscal 2024, and that crucial deal will expire by the end of fiscal 2025 (in April 2025) without any guarantee of a renewal. Baker Hughes already negotiated lower minimum annual revenue commitments to that JV over the past few years, so it could either reduce those payments again or simply refuse to renew the deal.
Lastly, C3.ai has gone through four CFOs in as many years, repeatedly changed the way it counts its customers from quarter to quarter, and constantly shifted its business strategies without proving that it can actually widen its moat in an increasingly crowded market. That might be why its insiders have been net sellers over the past 12 months.
Is it time to buy or sell C3.ai's stock?
C3.ai's stock is still trading below its IPO price for obvious reasons. Its sales growth is stabilizing, but it's grappling with severe customer concentration issues and lacks a clear path toward profitability. So for now, I'd rather stick with pricier AI stocks with more sustainable business models than buy C3.ai as a turnaround play.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
