C3.ai Stock Alert: Should You Invest Before 2023 Ends?

Stock Market

Founded in 2009, C3.ai (NYSE:AI) aims to empower businesses with artificial intelligence. CEO Thomas Siebel, who offers over 40 customizable AI applications across various industries, sees the AI opportunity as transformative as the internet or smartphones. Recent fiscal 2024 Q2 results reveal notable growth in customer engagements and revenue, prompting investor consideration. This has considerable implications for AI stock.

C3.ai’s profit expectations have shifted. Profitability (adjusted) is now projected for fiscal Q4. However, despite a solid earnings beat, disappointment arose among investors anticipating immediate profitability. This, in addition to discouraging guidance, has provided some investors with pause.

That said, as the Federal Reserve nears rate cuts, this stock may fly from here. Let’s dive into what investors should make of C3.ai right now.

C3.ai Misses Fiscal Q2

C3.ai shares fell following the company’s Q2 earnings release, in which revenue came in below estimates, and the AI software maker provided a weaker-than-expected outlook. In the October quarter, the company reported a loss of 13 cents per share, worse than the 11-cent loss a year ago.

Revenue increased by 17% to $73.2 million, slightly missing Wall Street estimates. For the current quarter ending in January, the company forecasted revenue to come in at $76 million. Despite strong new booking growth, income guidance was lowered due to increased investments. 

Oppenheimer analyst Tim Horan noted that the company prioritizes pilot trials and transitions to consumption-priced services, impacting short-term growth and margins.

The software maker adjusted its profitability target due to increased investments in AI. AI stock dropped 10.8% to $26.02 after a 172% gain in 2023. The company anticipates revenue growth as AI pilot projects move to commercial production. 

Deutsche Bank (NYSE:DB) analyst Brad Zelnick maintains a sell rating, expressing caution about C3’s conversion and investment pace, visible in results and guidance, with top-line and gross margins affected by a higher mix of pilots. 

C3.ai, among many AI stocks, withdrew its adjusted profitability target for this fiscal year amid substantial AI investments.

Revenue Growth is Increasing But At a Slower Pace

Eighteen months ago, C3.ai shifted from a time-consuming subscription-based model to a consumption-based one for quicker deals and cost-effective customer onboarding. This move initially slowed revenue growth during the transition.

In the recent Q2 of fiscal 2024, C3.ai surpassed expectations with a 17% revenue increase to a record $73.2 million. Anticipate gradual but promising growth, requiring investor patience.

Despite ongoing losses, C3.ai invests heavily in growth as well as research and development. Q2 saw a net loss of $69 million, but adjusting for one-off and non-cash expenses like stock-based compensation, the loss was smaller at $15 million. With $762 million in cash and marketable securities, the company can sustain such losses for the foreseeable future. 

However, to secure a sustainable increase in its stock price, it needs to demonstrate its ability to generate positive earnings to investors eventually.

Now’s the Time to Be Cautious C3.ai

While mixed quarterly results usually don’t trigger significant stock declines, C3.ai faced a deeper downturn. Investors disliked the near-term financial outlook, with Q3 revenue expectations below consensus estimates and full-year projections slightly below Wall Street averages.

C3.ai saw its stock price plummet more than 40% from its June peak. The company’s valuation remains high despite this more attractive entry point for investors. With a price-to-sales ratio of nearly 12-times and the company’s ongoing unprofitability, I’m not considering AI stock a buy. While a rebound is possible, there are better AI stocks with more favorable risk-reward profiles, at least right now.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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