Is C3.ai Stock a Buy After the Microsoft Deal?

Shares of the leading enterprise AI application software company, C3.ai (AI), jumped over 24% on Nov. 19 following the announcement of an expanded partnership with Microsoft (MSFT). This strategic alliance aims to accelerate the adoption of enterprise AI solutions on Microsoft Azure, positioning Microsoft as C3.ai's preferred cloud provider and C3.ai as a preferred artificial intelligence (AI) application provider for Azure users.

The expansion of C3.ai’s partner ecosystem has worked in favor of the company, enabling it to close an increased number of agreements, and it remains a significant growth driver.

With this significant development, C3.ai’s stock is back in the green for the year. But does this new deal make the stock a buy? Let’s dive deeper into C3.ai's performance and prospects to find out.

Factors Supporting C3.ai Stock

• Accelerating Revenue Growth: C3.ai has been on a consistent growth trajectory. In Q1 of fiscal 2025, the company reported its sixth straight quarter of accelerating revenue growth. Year-over-year revenue growth has steadily climbed, from 11% in Q1 FY24 to 21% in Q1 FY25, reflecting rising demand for its AI solutions.
• Increasing Deal Volume: The company closed 71 agreements in Q1 FY25, a 122% increase year-over-year, including 52 pilot projects, up 117%. Management expects about 70% of these pilot projects to convert into production contracts, potentially fueling future growth.
• Expansion in State and Local Governments: C3.ai is rapidly gaining traction in the public sector, signing 25 agreements with state and local government agencies in Q1. This underpenetrated segment is proving lucrative, with C3.ai's state and local business growing over 500% year over year. Collaborations with major partners like Alphabet’s (GOOGL) Google Cloud have accelerated the adoption of C3.ai’s solutions, such as property appraisal tools and generative AI for public benefits. The company plans to extend its public sector offerings into Europe, potentially doubling its addressable market.
• Momentum in Federal Contracts: C3.ai's federal business now accounts for over 30% of its quarterly bookings, with new agreements across the U.S. military and intelligence sectors. This steady momentum demonstrates the company's ability to secure high-value contracts in a critical and stable market.
• Partner Ecosystem Driving Growth: The company’s partner network, including tech giants like Amazon (AMZN) AWS, Google Cloud, and Microsoft, remains a significant growth driver. In Q1 alone, 72% of its agreements were closed with or through these partners, marking a 155% year-over-year increase. Notably, C3.ai closed 40 agreements with Google Cloud in Q1, a 300% year-over-year increase. The growing diversity of use cases for its generative AI solutions across industries further underscores its broad market appeal.

C3.ai Stock: The Challenges

• Pilot Conversions Yet to Boost Revenue: While the company has secured a high number of pilot deals, these have not yet translated into substantial incremental subscription revenue. Management is optimistic about converting pilots into production contracts, but the revenue impact remains to be seen, especially as C3.ai's subscription revenue—comprising 84% of total revenue—has shown only modest growth. This raises concerns about its ability to capitalize on the surging demand for AI solutions. Notably, its subscription revenue growth rate in Q1 showed a sequential moderation.
• Declining Remaining Performance Obligation (RPO): A major red flag is the consistent decline in C3.ai’s RPO, a key indicator of future revenue. Over the past eight quarters, RPO has fallen from $458.2 million in Q1 FY23 to $204.5 million in Q1 FY25. This decline suggests potential challenges in sustaining long-term revenue growth.
• Conservative Fiscal 2025 Outlook: Despite strong Q1 results, C3.ai has reiterated its outlook for fiscal 2025. C3.ai expects to report revenue between $370 million and $395 million for FY25, reflecting a year-over-year growth rate of 19% to 27%. This indicates that the company may not see substantial gains from the AI adoption cycle, raising questions about the company's near-term growth potential.

Analyst Sentiment and Final Thoughts

C3.ai's expanded partnership with Microsoft is undoubtedly a positive development that will drive its agreements and overall revenue. Further, the company’s strong growth in state, local, and federal government contracts and a robust partner ecosystem positions it well for the future.

However, concerns about modest subscription revenue growth rate, declining RPO, and a conservative outlook temper enthusiasm.

Wall Street analysts maintain a “Hold” consensus rating, taking a cautious stance on the stock’s potential.