C3.ai Earnings Preview- A Litmus test for AI stocks

C3.ai (AI) is set to release its Q1 earnings on September 4 after the market close, with expectations of a loss of $0.13 per share and revenue of $86.94 million, according to FactSet. As a key player in the AI space, the company's results will serve as a crucial read-through for investor sentiment in the sector, particularly at a time when AI-related stocks have faced increasing selling pressure. The market’s reaction to C3.ai’s performance will provide valuable insight into the broader appetite for AI investments moving forward.

C3.ai is a software company specializing in enterprise AI applications that help organizations optimize operations like predictive maintenance and supply chain management. By offering ready-made applications rather than requiring companies to build AI models from scratch, C3.ai simplifies AI adoption. A key growth driver is its C3 Generative AI suite, which has seen strong demand, with nearly 50,000 inquiries last quarter and expectations to exceed 90,000 this quarter. As more companies seek scalable AI solutions, C3.ai is well-positioned for solid growth in fiscal 2025.

C3.ai's strengths lie in its positioning within the AI sector, a compelling growth narrative, and a debt-free balance sheet. The company’s cash and marketable securities, expected to reach around $735 million, represent approximately 25% of its market cap, helping preserve its intrinsic value. Despite challenges, C3.ai continues to project solid revenue growth, with FY25 guidance between $370 million and $395 million, exceeding prior expectations. This, combined with a well-capitalized balance sheet, makes it a potentially attractive opportunity for growth-focused investors.

However, C3.ai faces significant weaknesses as it transitions to a consumption pricing model, which reduces average contract values and impacts the predictability of long-term revenue growth. The company's customer acquisition costs remain notably high, requiring extensive spending on SG&A to gain future clients. Furthermore, the company’s revenue visibility is clouded by the uncertainty around converting pilot trials into long-term subscriptions, and these concerns have led to more cautious market sentiment. As a result, the stock has struggled to gain momentum, hovering around $23 per share.

Valuation remains a mixed story. While C3.ai trades at an appealing 3.4x book value for a fast-growing tech company, the real challenge lies in its margins. Gross margins, which have fallen to 58%, continue to decline, with management citing the increasing cost of pilot programs. Operating margins are also under pressure due to planned investments in sales, R&D, and marketing. As the company continues to burn cash to support growth, investor confidence may wane unless these margin pressures are addressed.

C3.ai (AI) reported strong Q4 results in May, significantly narrowing its EPS loss to (-$0.11) compared to the expected loss of (-$0.30). Revenue for the quarter grew 20% year-over-year to $86.6 million, surpassing the estimate of $84.4 million, with subscription revenue showing impressive growth of 41% year-over-year. However, professional services revenue declined by 57%. For the full year, AI's revenue increased by 16% to $310.6 million, exceeding the company's guidance. Looking ahead, the company provided Q1 revenue guidance between $84 million and $89 million, and an operating loss range of ($30M) to ($22M). FY25 revenue guidance of $370 million to $395 million also surpassed expectations, with the market responding positively as shares rose by 9.7%.

Key drivers for AI’s performance included strong demand for its C3 Generative AI products, with the company completing 13 generative AI pilots in Q4 and a total of 58 for the year. Subscription revenue acceleration and growing interest in generative AI products have been key factors in the company's success. Despite concerns about broadening beyond vertical-specific AI applications and visibility with its consumption revenue model, analysts remain optimistic, with several upgrading their outlooks and raising price targets, reflecting confidence in the company's growth potential.