C3.ai, a leading artificial intelligence (AI) software provider, has hit a roadblock in its stock market rally, with shares plummeting by 41% over the past three months. This sudden downturn comes on the heels of the company’s fiscal 2024 first-quarter earnings report, released on September 6, which revealed a shift in its financial outlook and raised concerns among investors.
Mixed earnings report
C3.ai reported fiscal Q1 revenue of $72.4 million, representing an 11% year-over-year increase, slightly exceeding its guidance range of $70.0 million to $72.5 million. However, this growth pales in comparison to the robust 25% expansion seen in the same period the previous year. The company’s non-GAAP net loss per share also decreased by 25%, standing at $0.09.
While these headline figures may appear promising, the company’s guidance for the current quarter fell short of market expectations. Wall Street had anticipated $78 million in revenue, but C3.ai’s management provided a range of $72.0 million to $76.5 million. Despite this, the midpoint of the guidance range still suggests a 19% year-over-year increase in revenue, indicating potential acceleration in top-line growth.
Concerns over weakening revenue pipeline
However, beneath the surface, there are warning signs that investors cannot afford to ignore. One such concern is the decline in remaining performance obligations (RPO), which dropped from $458 million in the prior-year period to $335 million. RPO measures the total future value of unfulfilled contracts, and a decrease in this figure suggests a weaker revenue pipeline.
One factor contributing to this decline is C3.ai’s shift from a subscription-based pricing model to a pay-as-you-go model. While the latter was intended to expedite deal closures, it has yet to yield the desired results. The company did manage to secure 32 deals in the last quarter, up from 31 a year ago. However, the average contract value dwindled from $1.4 million to $0.8 million during the same period. These figures point to a lack of traction in the enterprise AI software market for C3.ai at present.
Valuation concerns
Despite the recent sharp decline in its stock price, C3.ai still carries a rich valuation at 11.2 times its sales. This premium valuation may be difficult to justify given the company’s current top-line growth rate. The company’s full-year fiscal 2024 guidance anticipates revenue in the range of $295 million to $320 million, marking a 15% growth rate at the midpoint. While this would signify a substantial improvement from the 5.6% growth seen in fiscal 2023, the slowdown in deal-making activity observed in the last quarter could potentially impede C3.ai from meeting its targets.
Additionally, C3.ai has revised its adjusted operating loss guidance, now expecting it to fall between $70 million and $100 million for the year. This represents a downward revision from the previous outlook of $50 million to $75 million. The management attributes this higher loss guidance to their strategic decision to invest in lead generation, branding, market awareness, and customer success pertaining to their Generative AI solutions.
Analysts’ optimism and caution
While C3.ai’s recent challenges have led to a reevaluation of the stock, some analysts remain cautiously optimistic about its potential for growth. The company’s investments in emerging areas like generative AI could potentially lead to an acceleration in growth, aligning with the forecasts of some analysts.
However, for investors, the question remains whether to wait for this growth to materialize before considering an investment, given the company’s expensive valuation and the hurdles it currently faces in the market.
