C3.ai Experiences Growth in AI, Revises Estimates. Should Investors Consider Purchasing Shares?
C3.ai (AI's 3.16% share) witnessed fluctuations following the technology company's release of its latest quarterly results. The stock'sactivity left some investors perplexed, as it surged in after-hours trading post its report, only to open negatively the following morning, later recovering positively. This trend has been consistent since mid-November, leading to an annual increase of about 45%.
Let's delve deeper into the enterprise AI software company's recent earnings report to understand the stock's unpredictable behavior and determine if now is the right time to invest in the stock.
Underwhelming subscription growth and projections
In Q2 2025 (ending Oct. 31), C3.ai reported a substantial revenue increase to $94.4 million. The company has seen a continuous growth in year-over-year revenue since the past 1.5 years, moving from 11% in Q1 2024 to 21% growth in the previous quarter, culminating in a 29% revenue boost in Q2.
| Metric | Q1 '24 | Q2 '24 | Q3 '24 | Q4 '24 | Q1 '25 | Q2 '25 || --- | --- | --- | --- | --- | --- | --- || Revenue growth (YOY) | 11% | 17% | 18% | 20% | 21% | 29% |
Total revenue for the quarter surpassed the anticipated range of $88.6 million to $93.6 million. Subscription revenue, on the other hand, rose by 22% year over year to $81.2 million.
Revenue growth (YOY)
C3.ai reported a significant revenue surge, excluding revenue from Baker Hughes. The company anticipates extending this partnership, but is yet to make a decision regarding a renewal of its exclusive marketing agreement in the oil and gas industry, set to expire in June 2025. The company noted the waning influence of Baker Hughes revenue, which constituted 18% of the overall revenue in the quarter, down from 35% in fiscal 2023.
11%
Part of the reason for C3.ai's deliberations pertains to its recent partnership with Microsoft, valid until March 2030. Under this agreement, all of its solutions will be available on Azure and Microsoft salespeople will earn commissions for C3 AI sales, along with receiving quotas and special bonuses on Azure C3 AI sales. Microsoft will also subsidize C3 AI pilots and C3 AI production deployments on Azure as part of the deal.
17%
The company concluded 58 deals in the quarter, including 36 pilots. Pilots are short-term contracts, lasting three to six months, during which customers can test the service. Upon completion, the company aims to transition these customers into production. C3.ai is also gaining momentum in the federal sector. The government has started a push to adopt AI solutions, particularly in defense and intelligence sectors.
18%
The company's gross margin stood at 61.3%, a significant increase from 56.1% in the previous year and 59.8% in the preceding quarter. The adjusted gross margin, excluding stock-based compensation expenses, was approximately 70%. Subscription gross margin was at 56.8% in the quarter, a substantial improvement from the previous year's performance of 53.5%.
20%
C3.ai remains in the red, reporting an adjusted EPS loss of $0.06, an improvement from the $0.13 loss a year ago.
21%
Post announcing $7.1 million in free cash flow in Q1, the company reported negative $39.5 million in free cash flow in the quarter. The company had previously projected positive free cash flow for the year, but now intends to channel funds into its Microsoft partnership.
29%
C3.ai closed the quarter with $730.4 million in cash and marketable securities, maintaining a debt-free status.
The company projected Q3 revenue to range between $95.5 million and $100.5 million, representing a 22% to 28% growth. Additionally, it lifted its full fiscal year revenue forecast from $370 million to $395 million to a new range of $378 million to $398 million.
Should you buy C3.ai stock now?
The most prominent development for C3.ai is the Microsoft partnership, which has the potential to be transformative. However, the actual impact on the company remains to be seen, as not all such deals prove as successful as they may initially appear. The Microsoft partnership comes at a crucial moment, with the Baker Hughes partnership under review and revenue from this deal proving underwhelming.
At the same time, C3.ai is investing a substantial amount in stock-based compensation. Through the first half of its fiscal year, stock compensation amounted to $111.7 million against $181.6 million in revenue. Over the past year, C3.ai's share count has increased by 7.7%, mainly due to its high stock compensation. Furthermore, SaaS companies typically boast higher profit margins than C3.ai.
From a valuation perspective, C3.ai trades at a forward P/S ratio of approximately 12, based on current fiscal-year analyst estimates.
With discussions revolving around Baker Hughes and its questionable stock compensation strategies, along with the fragile state of profits in the sector, I'm not overly enticed by its valuation at present. Consequently, I won't pursue the stock post its significant gains towards the year's end, despite the positive advancements the company has been making.
In light of the financial analysis, some investors might want to reconsider their stance on whether to invest in C3.ai, considering the significant increase in stock compensation expenses and the company's operating in a sector with fragile profit margins. On the other hand, the potential of the Microsoft partnership could greatly impact the company's future financial performance, and it's essential to closely monitor this development in the world of finance and investing.
