2023-12-07 09:45:00 ET
Summary
- C3.ai, Inc. announces quarterly results that miss consensus estimates, marking three consecutive quarters without growth.
- The enterprise AI software company is focused on building its pipeline and increasing customer engagements, but the market remains skeptical due to the shift in its business model.
- C3.ai stock is inching towards the buy range at 8x EV/S targets.
After the close, C3.ai, Inc. ( AI ) announced quarterly results that missed consensus estimates. The AI enterprise software company hasn't reported growth in the last 3 quarters after shifting the business model towards consumption. My investment thesis is more Neutral on the stock with the additional dip in after-hours trading and the building momentum in the pipeline.
Disappointing Quarter From C3.ai
C3.ai disappointed the market by not hitting the revenue targets for FQ2'24 supportive of the company taking the next step higher. The AI enterprise software company reported the following quarterly results:
The company had reported consecutive quarterly revenues of $72 million, so the market really wanted to see revenues top estimates above $74 million. The stock would be roaring ahead, if C3.ai had beat estimates with revenues at $75+ million to soar past the record highs.
In addition, the enterprise AI software company only guided to FQ3 revenues of $74 to $78 million. The guidance hints at sequential revenues possibly not accelerating for another quarter, while the company maintained annual revenue guidance at $295 to $320 million.
C3.ai ended the quarter with a cash balance of $762 million, so the ongoing operating losses aren't overly relevant. The question is whether or not sales accelerate as forecasted by the ongoing AI revolution.
The company only reported a FQ2 loss from operations of $25 million, but the guidance has the loss topping $40 million in FQ3. C3.ai generates up to $10 million in interest income quarterly now to offset some of the losses.
Based on the below building pipeline, investors should want C3.ai to ramp up any necessary spending to convert the surging pilot deals into long-term customers.
Building Pipeline
C3.ai continues to boost the customers and engagements in the system. During FQ2, closed agreements hit 62 with pilots reaching 36. The company only had 13 pilots in the year-ago quarter indicating the soaring demand in the system.
The company only closed a total of 25 deals last FQ2, but the catch here is that the consumption model does not contribute much in the way of revenues in the pilot phase. C3.ai had previously highlighted how the generative AI deals are only for $250,000 over a 12-week pilot period.
While the company is reporting massive growth in new agreements and pilots at nearly 200% growth in the latter, the revenues from the generative AI deals alone aren't meaningful. At 20 pilot deals for generative AI in FQ2, C3.ai would only generate $5 million in revenue over the next quarter, though the number is up sharply from the $2 million estimate for those deals in FQ1.
The big key is that these deals take up to 5 or 6 quarters to really show revenue escalate. The enterprise customer has to approve the software deal, implement the software and ramp up consumption before C3.ai sees any major benefit.
Unfortunately, the market is having a hard time trusting the building pipeline due to the companies shift in the business model. The stock plunged after the hot AI IPO, and the market probably won't trust the management team until the financials start showing real sequential growth and move beyond a level first reached in FQ4'22.
Using a final FY25 revenue target of just $369 million and a conservative assumption of a cash balance falling to $500 million with the ongoing operating losses, the stock should trade in the following ranges, with investors looking to buy C3.ai at the lower end of the range:
- 5x EV/FY24 revenues of $369M = $20.
- 8x EV/FY24 revenue of $369M = $29.
The real upside is for FY25 revenues to grow far in excess of ~20% growth assigned to current targets. C3.ai just-reported revenues grew 17% YoY, and a massive amount of new deals and pilots are only in initial implementation or ramp-up mode.
Takeaway
The key investor takeaway is that C3.ai, Inc. is building a large pipeline, setting the company up for growth in FY25. The enterprise AI software market is taking longer than expected to launch, but this business appears ripe for an inflection point soon.
C3.ai, Inc. stock isn't a buy just yet, but investors should use any further weakness to start building a position in C3.ai.
For further details see:
C3.ai: Stalled For Now, But AI Pipeline Building (Rating Upgrade)