C3.ai Sees AI Momentum, Raises Guidance: Is It Time to Buy the Stock?

C3.ai (AI 3.16%), a leading enterprise artificial intelligence (AI) software company, has seen its stock bounce around following the release of its latest quarterly results. The stock soared in after-hours trading, only to open the next morning in negative territory before rebounding solidly into positive territory. Overall, the stock has been on a strong run since mid-November, trading up about 45% on the year as of this writing, erasing early year losses. Let's take a closer look at the tech company's recent earnings report to see why the stock has been bouncing around and whether now is a good time to buy the stock.

Disappointing subscription growth and guidance
For its fiscal second quarter of 2025, ended Oct. 31, C3.ai's revenue jumped to $94.4 million, comfortably above the $88.6 million to $93.6 million the company had previously forecast. Subscription revenue climbed 22% year over year to $81.2 million, while excluding income from Baker Hughes, its revenue surged 41%. However, the company is still deciding whether or not to renew its exclusive marketing agreement within the oil and gas industry when it comes up for renewal in June 2025, as Baker Hughes revenue has been diminishing over the years and was just 18% of its total in the quarter, down from 35% in fiscal 2023.

The company's gross margin came in at 61.3%, up from 56.1% a year ago and 59.8% last quarter, while its adjusted gross margin, which takes out stock-based compensation expenses, was around 70%. Subscription gross margin was only 56.8% for the quarter, up from 53.5% a year ago. C3.ai remains unprofitable, with the company posting an adjusted earnings-per-share (EPS) loss of $0.06, an improvement from the $0.13 loss it reported a year ago. After reporting $7.1 million in free cash flow in Q1, the company turned to negative $39.5 million in free cash flow in the quarter. The company ended the quarter with $730.4 million in cash and marketable securities and no debt.

The company guided for fiscal Q3 revenue to be between $95.5 million and $100.5 million, representing 22% to 28% growth, and increased its full fiscal year revenue guidance to a new range of $378 million to $398 million.

Is now a good time to buy C3.ai stock?
The most important thing to come out of the quarter for C3.ai was the Microsoft deal, which has the potential to be a game-changer. That said, we'll have to see what the actual impact is for the company, as not all of these types of deals work out as well as they sound. It comes at a good time, though, with the Baker Hughes partnership in question and revenue from that deal not doing well. At the same time, C3.ai is paying an exorbitant amount in stock-based compensation. Through the first six months of its fiscal year, its stock comp is $111.7 million versus $181.6 million in revenue. Over the past year, C3.ai's share count has risen from 119.9 million to 129.1 million, a 7.7% increase, as a result of its high stock compensation. The company also has a very weak margin profile compared to most software-as-a-service (SaaS) stocks.

From a valuation standpoint, C3.ai trades at a forward price-to-sales (P/S) ratio that is just about 12 based on current fiscal-year analyst estimates. While this is not particularly expensive, it is important to consider the company's high stock-based compensation and weak margins when evaluating its valuation.

In conclusion, C3.ai's recent earnings report showed strong revenue growth and an important strategic alliance with Microsoft. However, the company's high stock-based compensation and weak margins may give investors pause. While the Microsoft deal has the potential to be a game-changer, it remains to be seen what the actual impact will be. Investors should carefully consider the company's valuation and fundamentals before making a decision to buy the stock.