Is C3.ai a Buy?


Investors are wondering if this AI stock will follow in Palantir’s footsteps.

Investors have flocked to chip stocks, but artificial intelligence-powered software also could be an investing option over the next several years. C3.ai (AI -0.13%) is one of the players working to establish itself in the space. Its custom software applications use AI and data to make corporations more innovative and efficient.

There’s no denying the growth opportunity ahead of C3.ai. However, it’s unclear whether the company will emerge as a pack leader, nor is it certain that business results will translate to investment returns.

I’ve crunched the numbers and read the tea leaves to sort this out and help you determine whether the stock is a buy. Here’s a closer look.

Signs of progress in the business

C3.ai is a software company that develops and sells custom AI software applications. The company’s applications can do various things, from optimizing supply chains to detecting financial fraud. Any scenario where AI can help companies better use their data is a potential opportunity.

The company has spent over a year transitioning its business model from subscriptions to usage-based. Additionally, management began focusing on growing its customer base by shifting its sales strategy from winning the occasional big contract to rapidly winning smaller deals.

The results are starting to show. Revenue growth has accelerated for five straight quarters since bottoming out, and its number of customer agreements grew 52% year over year in the fourth quarter of C3.ai’s fiscal-year 2024 (ending April 30).

AI Revenue (Quarterly YoY Growth) data by YCharts

Management expects this momentum to continue. C3.ai forecasted revenue growth as high as 23% in Q1 and up to 27% for fiscal-year 2025. Guidance is somewhat wide ranging, but the company’s continually accelerating growth gives investors reason to believe C3.ai will deliver solid results.

Not the same as Palantir

Data intelligence company Palantir Technologies is the most popular comparison for C3.ai. Both companies sell custom software emphasizing AI and grew revenue at nearly identical growth rates in their most recent quarter. Palantir’s stock is currently far more expensive, though. Shares trade at an enterprise value-to-revenue ratio of 20 versus just over 7 for C3.ai. The argument is that C3.ai’s stock should trade at a higher multiple to close that gap.

However, investors shouldn’t buy the stock on this logic alone.

Palantir arguably deserves a premium to C3.ai’s stock for several reasons:

  1. Palantir has strong government ties that generate steady revenue.
  2. The company is consistently GAAP profitable.
  3. Palantir generates significant free cash flow.

C3.ai has government business but doesn’t specify how much. Meanwhile, the company has significant financial shortcomings; it is unprofitable and still burning cash.

The numbers show that Palantir’s stock trades at a higher valuation for good reasons.

Is C3.ai stock a buy?

C3.ai’s accelerating sales momentum is encouraging, and the influx of smaller deals and consumption-based billing means that growth could accelerate further as these customers mature and increase their spending in the future. However, there are two reasons why it’s hard to see the stock as a buy right now.

First, C3.ai is poised to remain unprofitable for a while. Management is guiding for operating losses between $95 million and $125 million for the upcoming fiscal year. These aren’t GAAP earnings that include all of C3.ai’s expenses but operating income (profits from day-to-day activities).

C3.ai fiscal year 2025 guidance

Image source: C3.ai.

Second, C3.ai is awarding an astonishingly high amount of stock-based compensation — roughly two-thirds of its $310 million revenue! Stock-based compensation increases the number of shares, which makes existing shares represent less of the company (dilution) and generally works against the stock price. Additionally, such high stock-compensation expenses mean the business isn’t anywhere near posting a GAAP profit. C3.ai’s total losses were $280 million in fiscal-year 2024, meaning it lost almost as much as it made in revenue.

AI Revenue (TTM) Chart

AI Revenue (TTM) data by YCharts

Investors can debate the stock’s valuation, but C3.ai’s troubling losses and a seemingly long road ahead to turning a profit could be enough to keep investors away from the stock altogether.

Justin Pope 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.



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