Shares of artificial intelligence software provider C3.ai (NYSE: AI) slumped on Thursday following a quarterly report that featured a mix of optimistic talk and underwhelming financial results. There’s no question that companies big and small are clamoring to leverage AI, but C3.ai’s approach just doesn’t seem to be working.
C3.ai’s revenue rose by 11% year over year to $72.4 million in the fiscal first quarter, which ended on July 31, hardly impressive against a backdrop of booming demand for everything AI. “It is difficult to describe the scale of the increasing interest that we are seeing globally in enterprise AI adoption. We are experiencing strong traction with our enterprise AI applications and especially C3 Generative AI,” said C3.ai CEO Thomas Siebel.
C3.ai announced a suite of domain-specific generative AI solutions along with its report, and the company claims that interest in these products is strong. “The market response to our Generative AI offerings is staggering,” said Siebel.
To be fair, C3.ai is in the middle of switching to a consumption-based business model which could be hurting revenue growth. Even so, the company’s full-year guidance is hard to square with its optimistic statements. C3.ai expects to generate between $295 million and $320 million of revenue in fiscal 2024, which works out to a growth rate of about 15% at the midpoint. That’s not much of an acceleration from the first quarter.
C3.ai’s generative AI products require 12 weeks to be fully deployed, so there’s a lag between when the company wins a customer for a pilot and when that customer starts contributing meaningful revenue. Still, the company is only one quarter into fiscal 2024. Its guidance suggests that these new products aren’t going to move the needle anytime soon.
The weak full-year guidance includes the impact of increased spending on lead generation and marketing campaigns. The company said in its report that it no longer expects to produce a positive non-GAAP profit by the fourth quarter because it plans to increase spending to support the growth of the new generative AI product suite.
You can view this increased spending in two ways. One, the company sees a huge opportunity and wants to go after it aggressively. Or two, it needs to ramp up spending because interest isn’t translating into sales. Given C3.ai’s guidance, the latter seems more likely.
While C3.ai stock has crashed from its peak, the company is still valued at about $3.25 billion, or somewhere around 10 times its revenue guidance. You must believe that growth is going to accelerate dramatically to justify this valuation.
While C3.ai’s pilot and trial customers are diversified across various industries, its actual bookings are heavily concentrated in the federal, defense, and aerospace industries. Two-thirds of bookings came from those industries in the first quarter. While the company is successfully convincing potential customers to take its products for a test drive, it has yet to prove that it can close meaningful deals outside of those core verticals.
C3.ai’s planned heavy spending to support mediocre growth within a booming industry throws up some red flags for me. With a lofty valuation and pronouncements from management that don’t really mesh with the company’s results or guidance, I’m happy to sit this one out.
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