2023-11-30 12:00:23 ET
Summary
- C3.ai is set to report its quarterly earnings results, with analysts predicting sales of $74 million, indicating a 19% YoY revenue growth.
- The company's profitability is expected to decline in the current quarter, but analysts forecast a small profit in the fiscal third quarter of 2025.
- Investors should pay attention to the ratio of subscription revenues, new contract wins, revenue growth guidance, and the pace of share dilution.
Article Thesis
C3.ai, Inc. ( AI ) will report its next quarterly earnings results next Wednesday. In this report, we will take a look at what investors can expect, what metrics will be important, and we'll also look at the longer-term outlook for the AI player.
What The Company And Analysts Are Forecasting
Let's first take a look at what C3.ai's guidance from the most recent quarterly earnings release implies for the current quarter, and what Wall Street analysts are currently predicting when it comes to the company's upcoming earnings results.
When the company reported its fiscal first quarter earnings results, the company guided for revenues of around $74 million, using the midpoint of the guidance range. That implies sequential revenue growth in the low single digits. On an annualized basis, that still makes for a solid revenue growth rate, but is far behind the explosive growth that other AI players such as NVIDIA ( NVDA ) are generating -- NVIDIA's most recent guidance implies sequential growth of more than 10% for the current quarter, and sequential growth was higher than that during the most recent quarter.
Of course, there's a chance that C3.ai's revenues come in ahead of the guidance midpoint. After all, the company outperformed its own guidance midpoint during the most recent quarter, too. If C3.ai's revenues come in closer to the top end of the guidance range, then sequential growth would be in the mid-single digits. That's still considerably behind the growth we see at NVIDIA, but it would be attractive nevertheless.
Analysts are forecasting that the company will report sales of $74 million on Wednesday, which is ahead of the guidance midpoint -- Wall Street analysts thus seem to agree that there is a good chance that C3.ai will outperform its guidance again, as it did during the previous quarter. A $74 million top-line number would equate to revenue growth of 19% on a year-over-year basis -- in absolute terms, that is attractive, but it's still a far cry from the 200%+ revenue growth NVIDIA has been racking up during the last quarter.
When it comes to C3.ai's profitability, analysts agree that the second quarter during the current fiscal year will not be a profitable one. The forecasted loss per share is $0.18, which would be a weaker result compared to the most recent quarter when the company generated a loss per share of $0.09. While a larger net loss would be unfortunate, I assume that most investors of C3.ai care more about the growth potential and the revenue performance, thus it would not be a disaster if C3.ai reports a larger loss compared to the fiscal first quarter. It is worth noting that analysts are also forecasting that losses will decline in the upcoming quarters, with the consensus estimate seeing a small profit in the fiscal third quarter of 2025, or a little more than a year from now. There is no guarantee that this will happen, but it seems reasonable to assume that losses will decline over time as revenues increase, which should result in operating leverage tailwinds for the company. Some lumpiness in profits on a quarterly basis could persist, however, due to the timing of new contracts, expenses, and so on.
What Investors Should Look Out For
Investors will naturally consider the company's top-line and bottom-line performance when C3.ai reports its results on Wednesday, but there are several other important metrics investors should be looking at.
First, the ratio of revenues that are generated via subscriptions is important. That ratio stood at 85% during the most recent quarter, and it would be nice to see an increase in the ratio -- subscription revenues are more predictable and less lumpy and could thus help smooth the revenue growth rate over time. Investors oftentimes value subscription revenues highly, thus a rising ratio of subscription revenues, relative to overall revenues, might result in valuation upside in the long run.
New contract wins, especially with large customers such as major corporations or government agencies, are another important item to look out for. If C3.ai reports big deals, that would indicate that its products are attractive and that big-pocketed players are willing to spend heavily on C3.ai's offerings. That would be a good sign regarding C3.ai's competitiveness and tech position. During the most recent quarter, C3.ai announced deals with major companies such as Shell ( SHEL ), and more such deals would be a positive sign, I believe.
Of course, C3.ai's guidance for the following quarter will be highly important as well. Will C3.ai's revenue growth rate accelerate? A revenue guidance suggesting accelerating revenue growth could be seen as a major positive and could potentially increase the perception of C3.ai being a major AI beneficiary. If, however, the company's revenue guidance suggests that growth will slow down, that would be a major negative, not only because it would bring up questions about the company's ability to capitalize on the AI growth theme, but also due to the fact that slowing revenue growth could make it harder for the company to break even in the foreseeable future.
C3.ai is not profitable yet and like many other not-yet-profitable growth stocks, it issues shares at a meaningful pace:
This is not a huge problem per se, but a rising share count dilutes shareholders over time. Looking at the pace of new shares being issued during the most recent quarter is thus a good idea as well -- is the dilution pace slowing down, or is it accelerating? What does the share count growth rate look like, relative to the revenue growth rate? In the very recent past, the share count growth rate has slowed down, as we can see in the above chart -- it would be nice if that trend persisted through the most recent quarter, as it would suggest that dilution will be less of a headwind going forward.
Is C3.ai A Good Investment?
Artificial intelligence will very likely have a huge impact on our lives in the coming years and decades. It will change the way we work and it will also have a profound impact on other aspects of our lives, e.g. due to better drug discovery that could improve healthcare systems, or due to the introduction of autonomous vehicles. It is pretty clear that some companies will benefit considerably from the AI trend, and C3.ai plans to be one of these companies. But at least for now, the company is neither amongst the largest AI players by absolute revenue generation, nor is it among the fastest-growing AI players -- its revenue growth rate of around 20% is nice, but it's a long way from being as strong as what NVIDIA has been delivering in recent quarters.
Buying C3.ai just because it has AI exposure is thus not a great idea, at least in my opinion. Based on it not being profitable yet, and based on the growth rate that is appealing but not ultra-strong, I do not believe that C3.ai is a must-own stock. If the company were to report much better than expected results for the second quarter, it would become more attractive as an investment. If margins are much higher than expected, that would be another positive, and the same could be said about its Q3 guidance potentially being much higher than what is expected today. But if C3.ai performs more or less in line with what analysts are forecasting today, then it is not (yet) a buy, I believe. Stronger, more profitable, more established, and faster-growing companies look more favorable compared to C3.ai at least for now, although it is important to note that C3.ai is now a better-looking investment than it was six months ago, when it was trading at a much higher share price despite still being smaller at the time.
For further details see:
What's The Outlook For C3.Ai Ahead Of Earnings?