C3.ai Stock Drop: Time to Buy or Sell?

C3. havehis (AI 0.42%) The stock fell 8% on Sept. 5 after it released its latest earnings report. For the first quarter of fiscal 2025, which ended July 31, the artificial intelligence (AI) software company’s revenue rose 21% year over year to $87.2 million and beat analysts’ estimates by 0 .3 million dollars. It narrowed its adjusted net loss from $11 million to $6.9 million, or $0.05 per share, which also missed the consensus forecast by $0.26.

Those growth rates looked healthy, but declining subscription growth and soft guidance rattled the bulls. Let’s look at these challenges and see if it’s the right time to buy or sell C3.ai shares while it’s still trading around 50% below its IPO price.

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Another quarter of accelerating revenue growth

C3.ai develops AI algorithms that can be plugged into an organization’s existing software infrastructure to accelerate, optimize and automate certain tasks. It also offers these algorithms as standalone services. It mainly serves large clients in the energy, industrial, financial and government sectors.

It generates most of its revenue from subscriptions, but launched a new consumption-based pricing model in 2022. It insists the change was necessary to attract more customers as headwinds led companies to control their expenses, but also cannibalized. subscriptions, reduced its remaining performance obligations (RPO or the value of remaining contracts not yet recorded as revenue) and reduced its average selling price (ASP) for each service.

Taurinites expected C3.ai subscription growth to accelerate alongside consumption-based charges as the macro environment stabilised. But in the first quarter, subscription revenue growth actually decelerated — ending a five-quarter stretch of accelerated growth — as its RPO fell at its steepest pace in more than a year. This slowdown was mainly caused by sluggish growth in its commercial market, which offset healthier growth in the public sector market.

Data source: C3.ai. YOY = Year Over Year. * GAAP basis.

On the bright side, C3.ai’s revenue growth accelerated for the sixth straight quarter and is expected to maintain that momentum with 21%-28% growth in the second quarter. Adjusted gross margin is also expected to remain flat at 70%.

However, the company did not raise its previous full-year revenue guidance of 19%-27% growth. The midpoint of that forecast roughly matched the consensus forecast for 23% growth, but investors likely expected it to boost the outlook to reflect the aggressive expansion of its services to the generative AI market.

Investors should remember that C3.ai once aimed to become profitable on an adjusted basis in fiscal 2024, but abandoned that goal a year ago to step up investments in research and development and marketing in the new its generative AI tools. Those investments don’t seem to be moving the needle and growing its revenue yet, so they’re simply crushing its operating margins in the short term.

It has yet to demonstrate that its business model is sustainable

Analysts expect C3.ai’s revenue to grow at a compound annual growth rate of 20% from fiscal 2024 to fiscal 2027. With an enterprise value of $2.2 billion, it seems reasonably valued at less than 6 times this year’s sales.

But analysts also expect C3.ai to remain unprofitable on a generally accepted accounting (GAAP) basis for the foreseeable future. They expect annual GAAP net loss to widen from $280 million in fiscal 2024 to $281 million in fiscal 2027.

To make matters worse, C3.ai generated more than a third of its revenue from a long-term joint venture with the energy giant Baker Hughes in fiscal year 2024, and the crucial agreement will expire by the end of fiscal year 2025 (in April 2025) with no guarantee of renewal. Baker Hughes has already negotiated lower minimum annual revenue commitments to that JV in recent years, so it could either cut those payments again or simply refuse to renew the deal.

After all, C3.ai has gone through four CFOs in as many years, repeatedly changed how it counts its customers from quarter to quarter, and constantly changed its business strategies without proving that it can effectively widen its moat in an increasingly crowded market. This could be why its insiders have been net sellers over the past 12 months.

Is It Time to Buy or Sell C3.ai Shares?

C3.ai shares are still trading below the IPO price for obvious reasons. Its sales growth is stabilizing, but it faces serious customer focus problems and no clear path to profitability. So for now, I’d rather stick with more expensive AI stocks with more sustainable business models than buy C3.ai as a turnaround play.