C3.ai(NYSE: AI) was one of the market's hottest tech IPOs when it went public four years ago. The enterprise artificial intelligence (AI) software provider went public at $42 a share, and its stock more than quadrupled to a record high of $177.47 in less than a month.
Yet by the end of 2022, C3.ai's stock had sunk to about $10 a share. It lost its luster as its revenue growth cooled off, it racked up steep losses, and investors fretted over its customer concentration issues. It's bounced back to about $38 over the following two years, but it's also struggled to rise above its IPO price again.
C3.ai probably hasn't minted any new millionaires since its public debut. But could this divisive company prove the bears wrong and generate millionaire-making gains over the next few years?
Image source: Getty Images.
Why is C3.ai such a divisive stock?
C3.ai develops AI algorithms that can be directly plugged into an organization's existing infrastructure to accelerate, automate, and optimize certain tasks. It also provides those algorithms as stand-alone modules. It originally only provided its services through subscriptions, but it pivoted toward consumption-based fees in 2022.
C3.ai mainly serves large government, financial, energy, and industrial customers, but it generates most of its revenue from a joint venture with the energy giant Baker Hughes(NASDAQ: BKR). That partnership accounted for 35% of its revenue in fiscal 2024 (which ended in April 2024), and those minimum revenue commitments will still account for about 32% of its projected revenue in fiscal 2025.
However, that key deal expires at the end of fiscal 2025 and hasn't been renewed yet. That lack of clarity is worrisome, since Baker Hughes has actually been negotiating lower minimum revenue commitments while reducing its equity stake in C3.ai over the past two years.
Furthermore, C3.ai faces tough competition from first-party AI services that are directly integrated in cloud platforms like Microsoft's (NASDAQ: MSFT) Azure, Alphabet's Google Cloud, and Amazon Web Services (AWS); diversified big data platforms like Salesforce; and robotic process automation (RPA) companies like UiPath. Newer and more pliable generative AI tools like OpenAI's ChatGPT could disrupt its business model.
C3.ai also seems to have management issues. It's gone through four CFOs since its public debut, changed its customer growth metrics several times, and it abruptly abandoned its short-term goal of achieving non-GAAP (adjusted) profitability last year in favor of developing more tools for the generative AI market.
How fast is C3.ai growing?
C3.ai's revenue growth was wildly uneven over the past five fiscal years. Its revenue initially surged in fiscal 2020, cooled off in fiscal 2021 amid the pandemic, but accelerated again in fiscal 2022 as those headwinds eased.
Metric
FY 2020
FY 2021
FY 2022
FY 2023
FY 2024
Revenue growth
71%
17%
38%
6%
16%
Adjusted gross margin
76%
76%
79%
77%
69%
Data source: C3.ai.
But in fiscal 2023, C3.ai's growth stalled out as it dealt with tougher macro headwinds for enterprise spending and intentionally cannibalized its own higher-value subscriptions with its lower-value consumption-based fees. Its growth accelerated again in fiscal 2024 as the macro environment warmed up again, and it anticipates 22% to 28% growth in fiscal 2025.
Analysts expect its revenue to grow at a compound annual growth rate (CAGR) of 21% from fiscal 2024 to fiscal 2027. It attributes that acceleration to its new U.S. government contracts, fresh deals with state and local governments, more demand from the energy sector, and the gradual growth of its generative AI business. It also expects to reach more cloud customers through a deeper "strategic alliance" with Microsoft Azure.
C3.ai's adjusted gross margin also expanded by a percentage point year over year to 70% in the first half of fiscal 2025, but it expects the rollout of new generative AI pilot programs to compress that metric over the next few quarters. Analysts also expect it to stay deeply unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP measures for the foreseeable future.
Is C3.ai a millionaire-maker stock?
With an enterprise value of $4.2 billion, C3.ai trades at 11 times this year's sales. That's a high valuation for a company that still has serious customer concentration and profitability issues. Its recent rally seems to be driven by the buying frenzy in generative AI stocks, but it could crash again if it loses Baker Hughes or fails to convert its generative AI pilot partners into paying customers. Simply put, I don't think C3.ai can generate millionaire-making gains for its investors anytime soon. Instead, I believe it's smarter to sell this volatile AI stock after its recent gains.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Salesforce, and UiPath. The Motley Fool recommends C3.ai and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
