How Much Will C3.ai Stock Be Worth in 5 years?

Shares of AI SaaS provider C3.ai (NYSE:AI) have experienced a turnaround in recent months, rising by nearly 7% over the last 90 days.

Though still down more than 20% in the last year, this trend might well be the beginning of a reversal for a company whose shares once traded above $175 before falling to less than $30 today.

Is this the beginning of a new surge for C3.ai, or will the stock return to lackluster performance after a brief spike?

C3.ai’s Revenue Growth Opportunity

Perhaps the strongest argument in favor of a C3.ai surge comes from a pricing decision the company made in 2022. Rather than charge its customers a subscription fee by default, the company chose to institute a consumption-based pricing model option.

The reasoning behind this move was to make AI tools more accessible to a wider range of businesses by lowering the barrier to entry.

This decision initially put a damper on revenue growth, but two years later it could prove to be a major sales generator as businesses spend more and more on AI software applications.

To be clear, subscription-based revenue is still important for C3.ai. As of the most recent earnings report, subscriptions still accounted for 92% of total revenue.

The company saw strong growth in this area, with subscription revenue rising 41% over the year-ago quarter to $79.9 million. Looking forward, though, consumption-based pricing could give the strong revenue growth trend additional longevity.

The last year has seen an important turnaround in revenue growth for C3.ai. After briefly contracting toward the end of 2022, the company’s revenues began to gain steam again throughout 2023.

In the most recent quarter, though, C3.ai reported overall revenue growth of 20%, higher than at any time since early 2022.

In addition, the company’s generative AI offerings continue to attract interest from some of the largest and most successful businesses in the world.

In the most recent quarter, for instance, C3.ai started AI pilot programs with Dow, ExxonMobil and Cargill, among others.

The use of the company’s software by such industry leaders gives C3.ai both good opportunities for additional growth and a strong moat that could protect it from competitive pressures.

Cumulatively, these trends have led management to update its forward revenue guidance to $370 to $395 million for the coming fiscal year.

Based on the $310.6 million it achieved in the full fiscal year that ended last quarter, this would imply revenue growth of 19 to 27%. Analyst forecasts largely echo this range with a projection of 20.5% revenue growth in the coming 12 months.

The Downside for AI Investors

Though revenue growth is likely to accelerate in the coming year, C3.ai still has some significant business challenges to overcome. The most pressing of these is its ongoing pattern of large losses.

In the trailing 12-month period, the company has lost $279.7 million dollars, nearly as much as the revenue it produced over the same time frame.

Even more concerning is the fact that the volume of net losses has only accelerated over the company’s history. In 2021, for example, C3.ai lost a comparatively modest $157 million.

Net margins have followed a similar trend, with the company losing more money as a share of its revenue as its sales have grown.

Going back to 2021, the company’s full-year net margin was -67.7%. Today, that number has deteriorated even further to -93.4%.

A final issue that investors should be aware of before buying AI shares is the fact that stock-based compensation (SBC) has the very real potential to become a drag on the company’s share prices.

While many businesses, particularly fast-growing ones, use SBC to reward employees, C3.ai may have taken the idea too far.

At over $200 million worth of stock issued to employees annually, the company risks diluting its shares in a way that disadvantages both employee and non-employee shareholders.

Are Investors Paying a Fair Price?

Another question to consider beyond C3.ai’s growth is the pricing of the stock itself. At 12.1 times sales, there’s little doubt that AI shares are expensive right now.

The pricing makes a bit more sense, however, when you consider the company’s massive cash reserve and lack of long-term debt.

As of the last quarter, C3.ai had over $750 million in cash and equivalents. This is sufficient to keep the company operating for several more years.

Thanks in large part to this reserve, C3.ai’s price-to-book ratio is a somewhat more reasonable 4.1. While still pricey, AI shares could justify their valuation if growth continues to accelerate.

How Much Will C3.ai Be Worth In 5 Years?

C3.AI will be worth $23.40 per share in 5 years according to a discounted cash forecast analysis.

Overall, the conditions seem right for continued upward movement in C3.ai shares. Rising revenues and a market that is eager for practical AI applications are both positives for the stock. Assuming management can hit its own growth targets, it’s quite likely that C3.ai will continue rising.

A consideration that could be perhaps even more important in generating a surge for C3.ai shares is management’s forward net income guidance. Much like revenue, net income is expected to improve considerably in FY2025.

Management sees net losses in a range of $95 million to $125 million, less than half the trailing 12-month level. If the company can achieve this, it’s likely that shares will rise significantly as investors begin looking at a clearer path toward profitability.

Investors should, however, also keep the risks in mind. Even with losses cut by more than 50%, C3.ai will still be a long way from turning a profit. If the higher revenues that management has touted in its guidance fail to materialize, it’s also quite possible that shares could begin selling off again.

At the end of the day, C3.ai may be a decent growth play choice for risk-tolerant investors who are bullish on AI, comfortable with volatility and willing to buy and hold. The risks are fairly high, but the company’s strong financial position and growing interest in its suite of turnkey AI tools also give it a great deal of opportunity for future success. More cautious investors may prefer a wait-and-see approach, as there’s still a decent amount of uncertainty around C3.ai’s future.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.