C3.ai (AI -10.82%) The hype around artificial intelligence (AI) has sent stocks soaring this year, quadrupling their value. But investors were a little disappointed with the company’s guidance. That’s because despite all the company’s AI tools and solutions, management predicted what many thought would be a modest 15% growth rate in fiscal 2024. It suggests that lowering expectations may have been a strategic decision.
The company expects even greater growth in the future
in a recent interview Barons, Siebel admitted that he expects the business to grow further. The stock has “reset to a reasonable level,” he said. “We’re in a beat and raise, beat and raise, beat and raise position right now.
By not stating that C3.ai will deliver higher growth, Siebel has set the bar low. And Wall Street likes a solid profit beat. Siebel took some of the pressure off his C3.ai in the upcoming quarter by not showing analysts all of the company’s cards.
Overall, this is not a bad move, but one that can lead your business to success. Often times, companies feel pressured to hit numbers and can cut corners by focusing too much on the short term.
C3.ai has averaged 20% growth since going public
But the danger for investors is to read too much into the CEO’s words. Despite providing AI solutions for various industries, C3.ai struggled to generate consistent growth.
AI Revenue (Quarterly YoY Growth) Data from YCharts
C3.ai sales were flat last quarter, at $72.4 million for the period ending April 30. And in the period before that, the company’s sales were down 4%, totaling just $66.7 million.
C3.ai is still in its early stages of growth, despite offering over 40 different AI applications, including money management, law enforcement, demand forecasting, and more. not shown.
With the advent of chatbots and the proliferation of AI, the company’s AI solutions may attract more customers’ attention, but that doesn’t seem to be the case at this point.
Earnings growth may not be the most important metric for investors
Strong sales often attract investors’ attention, but operating cash flow is perhaps more important. If a company isn’t generating cash from its day-to-day operations, it may not be able to afford to pursue all its growth opportunities.
AI Sales Cash (Quarterly) Data by YCharts
C3.ai had positive operating cash flow last quarter. However, the company’s stock-based compensation totaled $48 million. Had these expenses been paid in cash instead of stock, C3.ai’s business would still be running out of cash. C3.ai still has a long way to go to prove it can generate positive cash flow without relying on equity-based expenses.
Will the potential for soft guidance make C3.ai a good stock to buy?
C3.ai may outperform internal expectations, but ultimately analysts will set their own expectations. So even if a company beats its own expectations, it may not always be enough to create a bullish mood in the stock.
This year’s economic downturn certainly doesn’t bode well for C3.ai, as companies may cut back on spending. Ultimately, I’ll continue to take a wait-and-see approach with this tech stock until C3.ai proves it can recapture his strong growth of over 20%. There are no results yet to support that benefit.
