C3.ai Stock Plunges: Is It Time to Buy or Sell?

C3.ai‘S (Artificial Intelligence 0.42%) shares fell 8% on Sept. 5 after it released its latest earnings report. In the first quarter of fiscal 2025, which ended July 31, the artificial intelligence (AI) software company’s revenue rose 21% year over year to $87.2 million and beat analyst estimates by $0.3 million. It reduced its adjusted net loss from $11 million to $6.9 million, or $0.05 per share, which also beat the consensus forecast by $0.26.

These growth rates seemed healthy, but its slowing subscription growth and weak outlook have rattled bulls. Let’s look at these challenges and see if it’s the right time to buy or sell C3.ai stock while it’s still trading about 50% below its IPO price.

Another quarter of accelerated revenue growth

C3.ai develops AI algorithms that can be plugged into an organization’s existing software infrastructure to accelerate, optimize, and automate specific tasks. It also provides these algorithms as standalone services. It primarily serves large clients in the energy, industrial, financial, and government sectors.

Most of its revenue comes from subscriptions, but in 2022, the company introduced a new consumption-based pricing model. The company says the change was necessary to attract more customers as macroeconomic headwinds forced companies to cut spending, but it also cannibalized subscriptions, reduced remaining commitments (RPOs, or the value of remaining contracts that have not yet been recorded as revenue) and lowered the average selling price (ASP) of each service.

Bulls had expected C3.ai’s subscription growth to accelerate along with consumption-based fees as the macro environment stabilized. However, subscription revenue growth actually slowed in the first quarter—ending a five-quarter streak of accelerating growth—as RPO fell at its fastest pace in over a year. The slowdown was primarily driven by sluggish commercial market growth offset by healthier public sector market growth.

Data source: C3.ai. YOY = year-over-year. *Based on GAAP.

On the bright side, C3.ai’s revenue growth accelerated for the sixth consecutive quarter and expects to continue that momentum with growth of 21%-28% in Q2. Adjusted gross margin is also expected to hold steady at 70%.

However, the company did not raise its previous full-year revenue forecast of 19% to 27% growth. The midpoint of that forecast roughly matched the consensus forecast of 23% growth, but investors likely expected it to raise that outlook to reflect the aggressive expansion of its generative AI services.

Investors should note that C3.ai once aimed to be profitable on an adjusted basis in fiscal 2024, but abandoned that goal a year ago to increase R&D and marketing investments in its new generative AI tools. Those investments don’t appear to be driving earnings and revenue growth yet, so they’re just crushing near-term operating margins.

Its business model has not yet been proven to be sustainable

Analysts predict C3.ai’s revenue will grow at a compound annual growth rate of 20% from fiscal 2024 to fiscal 2027. With an enterprise value of $2.2 billion, it seems reasonably valued at less than 6 times this year’s sales.

However, analysts expect C3.ai to remain unprofitable on a GAAP basis for the foreseeable future. They expect its annual GAAP net loss to widen from $280 million in fiscal 2024 to $281 million in fiscal 2027.

Worse still, C3.ai generated more than a third of its revenue from a long-term joint venture with the energy giant Hughes Baker in fiscal year 2024, and this key agreement will expire by the end of fiscal year 2025 (April 2025) with no guarantee of renewal. Baker Hughes has already negotiated lower minimum annual revenue commitments for this JV over the past few years, so it could either lower these payments again or simply decline to renew the agreement.

Finally, C3.ai has gone through four CFOs in as many years, repeatedly changed how it counts customers from quarter to quarter, and constantly changed its business strategies without proving that it can actually widen its moat in an increasingly crowded market. Perhaps that’s why its insiders were net sellers over the past 12 months.

Is Now Time to Buy or Sell C3.ai Stock?

C3.ai stock is still trading below its IPO price for obvious reasons. Sales growth is stabilizing, but the company is struggling with serious customer concentration issues and has no clear path to profitability. So for now, I’d rather stick with higher-priced AI stocks with more sustainable business models than buy C3.ai as a turnaround play.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.