C3.ai(NYSE: AI), a developer of artificial intelligence (AI) algorithms, went public at $42 a share on Dec. 9, 2020. Its stock started trading at $100 and soared to a record high of $177.47 two weeks later. It generated a lot of buzz because it was growing rapidly, 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 in hypergrowth and meme stocks amplified those gains.
But today, C3.ai trades at $24. It plummeted below its IPO price as its growth slowed down, it racked up more losses, and rising rates popped its bubbly valuations. Let's see where this volatile AI stock might be headed over the next three years.
Image source: Getty Images.
What happened to C3.ai over the past several years?
C3.ai develops AI algorithms which 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 only provided its algorithms as subscription-based services, but it also rolled out consumption-based fees in 2022 to attract more cost-conscious customers in a tougher macro environment.
The company mainly serves large customers across the energy, industrial, financial, and government sectors, but it generates about 30% of its revenue from a joint venture with the energy giant Baker Hughes.
From fiscal 2020 to fiscal 2024 (which ended on 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.
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.
C3.ai was growing rapidly prior to its public debut, but it lost its momentum in fiscal 2021 as the pandemic disrupted the energy and industrial sectors. Its growth accelerated again in fiscal 2022 as it lapped those challenges, but it suffered another slowdown in fiscal 2023 as high interest rates and other macro headwinds drove many companies to rein in their software spending. It also cannibalized some of its higher-value subscriptions with its new consumption-based fees.
Its revenue growth stabilized in fiscal 2024 as more organizations installed its algorithms to hop aboard the AI bandwagon. However, its gross margin declined again as it lost its pricing power and generated more revenues 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 ramped up its research and development spending as well as marketing budgets for new generative AI applications.
What will happen to C3.ai over the next three years?
For fiscal 2025, C3.ai expects its revenue to rise 19%-27%, which matches analysts' expectations for 23% growth. That steady growth should be driven by introducing its 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 doesn't renew that key deal or accepts lower minimum revenue commitments from Baker Hughes, its revenue could plummet in fiscal 2026.
A few bright red flags have already appeared. Baker Hughes significantly reduced its equity stake in C3.ai over the past year. Dan Brennan, the senior VP of the joint venture, abruptly stepped down this June. Several major investors have also sued C3.ai for allegedly misrepresenting and exaggerating its 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 seem stable, but they're pinned to the hope that it will renew its joint venture with Baker Hughes with favorable terms. Even if C3.ai renews that deal and continues to expand, analysts expect it to stay in the red with annual net losses of $200-$300 million from fiscal 2025 to fiscal 2027. But the company won't go bankrupt anytime soon, since 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 its latest quarter.
Where will its stock head in three years?
With an enterprise value of $3.1 billion, C3.ai still looks reasonably valued (but not cheap) at six times this year's sales. But it's also increased its shares by 32% since its IPO, and that dilution should continue as it racks up even more losses.
If C3.ai matches analysts' expectations, grows its revenue by 20% in fiscal 2028, and still trades at six times forward sales by then, its stock might climb roughly 25% to $30 over the next three calendar years. That would be a decent gain, but it would remain well below its IPO price and possibly even underperform the S&P 500 -- which generated an average annual return of more than 10% over the past several decades. That's why I still wouldn't buy C3.ai stock as a turnaround play.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
