Where will the C3 stock be. are you over 3 years old?

C3. have (AI 1.99%)a developer of artificial intelligence (AI) algorithms, went public at $42 per share on December 9, 2020. Its stock began trading at $100 and rose to a record high of $177.47 two weeks later late. It generated a lot of buzz because it was growing fast, had a catchy ticker symbol, and was founded and led by Tom Siebel, who previously sold his company Siebel Systems to Oracle in 2006. The buying frenzy of hypergrowth and meme stocks amplified these gains.

But today, C3.ai is trading at $24. It fell below its IPO price as growth slowed, racked up more losses and rising rates inflated its valuations. Let’s see where this volatile AI stock could be headed in the next three years.

Image source: Getty Images.

What has happened to C3.ai in recent years?

C3.ai develops AI algorithms that can be plugged into an organization’s existing software infrastructure to automate, accelerate and optimize certain tasks. They can also be used to detect financial fraud and improve safety standards. It initially provided the algorithms only as subscription-based services, but also implemented consumption-based fees in 2022 to attract more cost-conscious customers in a tougher macro environment.

The company primarily serves large clients in the energy, industrial, financial and government sectors, but generates about 30% of revenue from a joint venture with the energy giant. Baker Hughes.

From fiscal 2020 to fiscal 2024 (which ended April 30), its revenue grew at a compound annual growth rate (CAGR) of 19%. But its growth rates have been unpredictable, and its adjusted gross margins are gradually declining.

Data source: C3.ai.

C3.ai grew rapidly before its public debut, but lost momentum in fiscal 2021 as the pandemic disrupted the energy and industrial sectors. Its growth accelerated again in fiscal 2022 as it overcame these challenges, but suffered a further slowdown in fiscal 2023 as high interest rates and other macroeconomic headwinds led many companies to rein in their software spending the It also cannibalized some of its higher-value subscriptions with its new consumption-based charges.

Its revenue growth stabilized in fiscal 2024 as more organizations installed their algorithms to get on board AI. However, its gross margin fell again as it lost its pricing power and generated more revenue from its lower-margin consumption-based fees. It also abandoned its original goal of achieving profitability on a non-GAAP (generally accepted accounting principles) basis in fiscal 2024 as it increased its research and development spending as well as marketing budgets for new generative AI applications .

What will happen to C3.ai in the next three years?

For fiscal 2025, C3.ai expects its revenue to grow 19%-27%, which is in line with analysts’ expectations for 23% growth. This steady growth should be driven by the introduction of new algorithms for chatbots and other generative AI services.

However, C3.ai’s partnership with Baker Hughes is also set to expire by the end of fiscal 2025. If it does not renew the key agreement or accept lower commitments from Baker Hughes, its revenue could decline in the fiscal year 2026.

A few red flags have already come up. Baker Hughes has significantly reduced its stake in C3.ai over the past year. Dan Brennan, senior VP of the joint venture, abruptly resigned in June. Several major investors sued C3.ai for allegedly misrepresenting and exaggerating the relationship with Baker Hughes.

For now, analysts expect C3.ai’s revenue to grow 21% in fiscal 2026 and 17% in fiscal 2027. Those growth rates look steady, but are focused on hopes that it will renew its joint venture with Baker Hughes with favorable conditions. . Even if C3.ai renews the deal and continues to expand, analysts expect it to remain in the red with annual net losses of $200-300 million from 2025 to 2027. But the company won’t go bankrupt anytime soon, as it still had $763 million in cash, cash equivalents and marketable securities with a low debt-to-equity ratio of 0.2 at the end of the last quarter.

Where will its stock be headed in three years?

With an enterprise value of $3.1 billion, C3.ai still looks reasonable (but not cheap) at six times this year’s sales. But it’s also raised its stock 32% since its IPO, and that dilution should continue as it posts even more losses.

If C3.ai matches analysts’ expectations, grows revenue by 20% in fiscal 2028 and continues to trade at six times forward sales by then, its stock could rise by about 25% to $30 over the next three calendar years. That would be a decent gain, but it would remain well below the IPO price and possibly even underperform the S&P 500 — which has generated an average annual return of more than 10% over the past few decades. That’s why I still wouldn’t buy C3.ai stock as a return play.