C3.ai: There's a Lot to Be Unsure of, But Here's What a Trader Might Do

Though never truly invested, the name has been a rather decent trader for much of 2023. C3.ai (AI) released the firm's financial results for the firm's fiscal first quarter on Wednesday afternoon.

For the three months ended July 31st, AI posted an adjusted EPS of a loss of $0.09 (GAAP EPS: $-0.56) on revenue of $72.362B. The lion's share of the adjustments made were done for stock-based compensation expense.

Both the adjusted earnings print and the revenue print topped expectations. However, with revenues up just 10.8% year over year and flat on a sequential basis, one has to wonder if sales are or have plateaued. Remaining Performance Obligation (RPO) stands at $334.6M, down from $381.4M three months earlier. Current RPO printed at $170.6M, down from $186.3M a quarter ago.

Operations

C3.ai, for those unaware, provides software and services to clientele competing in data-intensive industries that help build enterprise-scale AI applications or digital solutions that apply AI and/or machine learning. Subscription revenue for the quarter totaled $61.352M (+7.6%), as revenue driven by professional services grew 32.9% to $11.01M.

As revenue was growing 10.8%, the cost of that revenue increased 72.8% to $31.813M. That left a GAAP gross profit of $40.549M (-13.6%) on a GAAP gross profit margin of 56% down from 71.8%. (Adjusted gross margin printed at 69%, down from 81%.) Subscription gross margin printed at 50.4%, down from 75.3%. Services gross margin landed at 87.5%, up from 47.9%.

GAAP operating expenses decreased 4.5% to $114.642. This put the firm's operating income/loss at $-74.093M. down small from last year's comp of $-73.209M. Once adjusted, the firm's operating income/loss becomes $-20.713M, still down from last year's $-14.537M. After accounting for (a nice pop in) interest and taxes, GAAP net income/loss stood at $-64.358M, up from $-71.871M a year ago. Adjusted, net income/loss improved to $-10.978M from $-13.199M a year ago. That's how $-0.56 per share becomes $-0.09 per share.

Guidance

For the current (fiscal second) quarter, AI sees total revenue generation of $72M to $76.5M and an adjusted operating income/loss of $-40M to $-27M. Wall Street had been expecting to see revenue of slightly less than $74M.

For the full year, the firm sees revenues of $295M to $320M and an operating income/loss of $-100M to $-70M. Consensus had been for revenue of $308M.

Fundamentals

For the quarter reported, AI drove operating cash flow of $3.936M. Out of this comes CapEx of $12.838M, leaving free cash flow of $-8.902M. While still not optimal, for the year ago quarter, free cash flow printed at $-54.794M. The firm obviously does not return capital to shareholders.

Glancing at the balance sheet, AI ended the period with a cash balance of $750.875M and current assets of $894.795M. Current liabilities add up to $110.711M, and this includes referred revenue of $40.943M. That puts the firm's current ratio at a beefy 8.08 and once I remove the deferred revenue, at an eye-popping 12.83.

Total assets amount to $1.089B, including a very small amount labeled as "goodwill." Total liabilities less equity comes to just $156.961M, and I don't see anything in here that smells like debt. This balance sheet is built for the long-term.

Wall Street

Overnight, I have found seven sell-side analysts that are rated at a minimum of four stars at TipRanks and have also opined on C3.ai. Among the seven, we have one "buy" rating, three "hold" or hold-equivalent ratings and three outright "sell" or sell-equivalent ratings. Two of our holds did not set a target price, so we are left with five targets to work with.

The average target price across the five is an even $24, which is below the last sale. The average does not really tell the story though. The high target is $42. That's one of my favorite analysts, Dan Ives of Wedbush. He is the "buy" but he did take his target down from $50. The low target price is $14. That's Joshua Tilton of Wolfe Research. Away from those two, the average of the other three is just $21.33.

My Thoughts

There's a lot to be unsure of here. The firm says that it "made the decision to invest in lead generation, branding, market awareness, and customer success related to our Generative AI solutions."

This is basically the firm's explanation for forward guidance that remains unprofitable even on an adjusted basis for the fiscal year 2024 in its entirety. The firm does, however, expect to be cash flow positive for Q4 of FY 2024 and for the following fiscal year. You won't see that tidbit of information in the press release, it came up during the call.

Really, I find it almost alarming that amid the AI craze of the past quarter, this firm's acceleration has clearly slowed. Revenues have started to run sideways, the firm is making headway in working their way through their remaining performance obligation and their deferred revenues.

That said, the balance sheet is golden. Yes, this firm is burning cash, but take a look at that balance sheet. This firm can burn cash for a long while without going away. However, that doesn't mean that the stock is a buy, though Dan Ives thinks it is and that does give me pause.

The stock trades at 13 times twelve trailing months' sales. Apple trades at less than 8 times. That's expensive for a money pit. Right now, AI, the stock, is a money pit and it can not back up its share price with growth. Trade AI? As I mentioned above, I have traded it on and off all year. Invest in AI? In this environment? Not unless I understand that this is about as speculative as speculation gets and I don't intend to follow the name closely.

Readers will note that as this stock has gapped lower this morning, it approaches its 200 day SMA (simple moving average)($25.25) as well as the 61.8% Fibonacci retracement level of the late December through mid June rally ($25.10). This stock loses those two levels and the next stop probably has a $17 handle.

The trader might go long a $27 straddle for a net debit of $1.40 expiring this Friday as an inexpensive way to play short-term volatility. Looking to short the name? Be careful with that. A rough 36% of the entire float is held in short positions, making the name potentially vulnerable to a short squeeze.

If an investor who is long this name is fortunate enough to benefit from a short squeeze... if I were he or she, I would say "sold."

At the time of publication, Stephen Guilfoyle was Long AAPL equity.