The growing popularity of artificial intelligence tools such as ChatGPT is more than just hype. The three quarterly results and guidance from chipmaker Nvidia (NVDA) suggest there’s still an insatiable appetite for AI. Another company riding that trendwave is C3.ai (AI), which has seen its stock surge 172% year to date, compared with 19% rise in the S&P 500 index.
The stock has risen near 25% just in the past thirty days as the company has launched various initiatives aimed at boosting long-term revenues while growing its customer base. Investors will hear how well these initiatives are working when the company reports second quarter fiscal 2024 earnings results after the closing bell Wednesday. Specializing in enterprise AI applications that meet the business-critical needs of global enterprises, C3 offers its clients solutions to simplify and accelerate AI application development, deployment, and administration.
Its management has been shifting the company’s business model away from short-term revenues to a transaction-based pricing method. As such, the proportion of the company’s revenue that comes from subscriptions holds significance: Subscription revenue provides a level of predictability and reduced volatility that smooths out the long-term revenue growth trajectory. In the latest quarter, this ratio stood at 85%. If the company can increase that percentage even modestly, it would be favorable for the stock.
The initiatives appear to be working with growth rates starting to re-accelerate. As it has outperformed its own guidance in the previous quarter, there’s a strong possibility that C3.ai will surpass the revenue guidance midpoint, yielding mid-single digit sequential growth. While it has shown to have a strong AI portfolio to rival many companies, the company will look to prove that it is here to stay and has a sustainable path towards profitability.
For the three months that ended November, Wall Street expects the Redwood City, Calif.-based company to post a per-share loss of 18 cents on revenue of $74.33 million. This compares to the year-ago quarter when the loss was 11 cents per share on revenue of $62.41 million. For the full year, the loss is expected to be 43 cents per share compared to a 42-cent loss a year ago, while full-year revenue of $308.2 million would rise 15% year over year.
Despite the surge in demand for generative AI, the company still has a lot to prove. While its quarterly revenue growth rate has decelerated, mainly due to the rising inflationary environment, the company’s fundamentals are stable, featuring a strong balance sheet with ample cash. What’s more, C3’s gross margin has remained steady, moving north of 70%. This strong margin position generates not only ample cash flow, but it also allows the management to reinvest capital back into the business, particularly in revenue-generating areas such as marketing and R&D.
Strong cash flow aside, profits have been hard to come by. The company is not expected to turn a profit until fiscal 2025, and that where the bears are focusing. But recent results have been encouraging: In the first quarter, C3.ai reported adjusted loss of 9 cents, which handily beat estimates by 8 cents. Q1 revenue was also strong, coming in at $72.36 million, rising 11% year over year, topping estimates by $76,000.
During the quarter, subscription revenue was $61.4 million, accounting for 85% of total revenue, while adjusted gross margin was 69%. Notably, the company announced a new C3 Generative AI Suite, which includes 28 new domain-specific generative AI solutions for industries, business processes, and enterprise systems. Assuming a top and bottom line beat on Wednesday, the Q3 guidance will reveal the revenue potential of the new generative AI solutions, thus being a key factor in the stock’s near-term direction.
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