C3.ai (NYSE: AI) stock presents investors with a serious dilemma.
One part of C3.ai is an operations business that offers turnkey artificial intelligence (AI) solutions to organizations spanning multiple industries that help them capitalize on the benefits of the technology. However, investors must also contend with the financial C3.ai, an entity dealing with considerable financial losses and other concerns.
Hence, the question for investors is which part of this business should drive investment decisions in the SaaS stock. Let’s take a closer look.
Admittedly, C3.ai looks like a dream for an AI-focused growth investor. The company is an enterprise software company that can bring AI capabilities to an organization by multiple methods.
Its enterprise AI offers more than 40 industry-specific solutions to meet what it calls business-critical needs. Indeed, companies from a variety of industries have incorporated C3.ai software into their operations.
In the past, it was particularly strong on the oil and gas side, especially in its relationship with energy company Baker Hughes.
As the Baker Hughes collaboration appears to have become less significant, C3.ai has pivoted to its other clients and the 71 other organizations that signed agreements with the company in the last quarter alone. That included 25 deals signed with state and local governments across the U.S.
Also, over 30% of bookings came from some part of the federal government, including three branches of the U.S. military. Considering such successes, it is likely hard for investors not to believe in C3.ai from an operations standpoint.
Unfortunately, these new deals do not seem to have translated into a strong C3.ai from a financial point of view. For the first quarter of fiscal 2025 (ended July 31), revenue came in at $87 million, a 20% increase from year-ago levels.
This was an improvement from the 16% increase in fiscal 2024. It may also indicate that the company’s transition from subscription to consumption-based pricing, which began in fiscal 2023, may stop weighing heavily on revenue growth.
Still, the higher revenue growth offers no relief to C3.ai’s operating expenses. At $125 million for fiscal Q1, they are 43% higher than the company’s quarterly revenue.
Shareholders should consider that stock-based compensation expenses, a noncash expense, accounted for $55 million of its operating expenses. From a cash perspective, that means its actual operating expenses are below revenues. Nonetheless, that still leaves C3.ai without an obvious path to profitability.
The $63 million net loss in the first quarter of fiscal 2025 was only a negligible improvement from the $64 million loss in the year-ago quarter. Despite those results, CEO Thomas Siebel said in a recent CNBC interview that the company’s profitability was a “mathematical certainty.”
However, until the company shows the numbers confirming that assertion, the stock may continue to repeatedly give back its gains.
Given the state of both sides of the business, the negatives of the financial C3.ai appear to outweigh the positives of the AI-driven C3.ai on the operations side. Thus, investors should probably avoid the stock for now.
Admittedly, it seems to have carved out a niche in the enterprise software businesses by helping organizations utilize AI. This is a powerful motivator for these entities to partner with the company. Unfortunately for shareholders, the financials do not show a “mathematical certainty” that will take C3.ai stock to profitability.
The most significant point of concern is the operating expenses that far exceed revenue. Although we know that stock-based compensation led to that situation, sustained profitability will be nearly impossible until it can grow revenue and reduce operating expenses.
Ultimately, until C3.ai can either grow its revenue faster or bring stock-based compensation expenses more in line with revenue, investors should stay away from this stock.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
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