C3.ai, Inc. Second Quarter Fiscal 2023 Results: Avoid This Stock (NYSE:AI)

Investment thesis

C3.ai, Inc. (NYSE: AI) is an AI application platform. He announced fiscal second quarter 2023 results that left a lot to be desired.

As a reminder, as we headed into this earnings call, I wrote:

[T]he bull case can be just assumed that this, buy the dip.

[…] I understand that the stock is already down more than 65% in the last year and therefore should be undervalued. However, I just can’t find any value in that name.

I believe that investors would do well to avoid this name.

Given this earnings report, I stand by these statements.

Cross the chasm?

C3.ai’s business model is designed to get its customers up and running in no time. The business model is one that allows developers to use its pre-built low-code or no-code modules and adapt them for their own use.

Think of C3.ai as a productive platform that helps customers across various industries collect predictive analytics to distill contextualized insights. C3.ai’s core product, C3 AI Application Platform, enables its customers to reduce the complexity of enterprise AI application development.

The problem with C3.ai is that there is a chasm between a similar platform and a non-discretionary platform. And I believe C3.ai is the latter.

Revenue growth rates are collapsing completely

Before going any further, keep in mind that C3.ai just released its fiscal 2023 second quarter.

What we see above is a graphic illustration of two companies. The one which grew by +38% over the 2022 financial year, the year of its IPO. And then we see this year’s performance.

Even if C3.ai undercuts estimates to allow for an easy pace further, its best-case scenario revenue growth rates will be around 0% year-over-year for the remainder of fiscal 2023. does not live up to its “disruptive narrative”.

C3.ai The path to profitability still has time

For the second quarter of fiscal 2023, C3.ai’s non-GAAP operating margins were 24%. However, as we look to the third quarter of fiscal 2023, its non-GAAP operating margins are showing around 39% lower. The company’s profitability seems to be going in the wrong direction.

Next, let’s look at C3.ai’s outlook for fiscal year 2023 offered at the end of the first quarter of fiscal year 2023:

Now let’s take a look at its recently upgraded outlook and Q2 fiscal 2023 results:

From where I’m standing it seems to me that after everything that’s happened with the stock down 90% from its highs I don’t believe this management team is working fast enough to save capital investors.

During this time, investors have contacted me and told me that they understand that C3.ai is cheap, and given that C3.ai holds around $860 million in cash, that equates to around +65% of its market capitalization.

And mathematically, it is. And while having a large cash position is obviously compelling, we need to step back and think. Are we supposed to invest in this unprofitable company for the money on its balance sheet? Is that really what is at stake here?

On the other hand, note that stock-based compensation in the second quarter of fiscal 2023 increased 74% year-on-year. How is this level of compensation appropriate when the company’s revenue growth rates are only 7% year-on-year?

For their part, I must point out that C3.ai states that it will be non-GAAP profitable by the end of fiscal year 2024.

Reservations are going in the wrong direction

As a reminder, reservations are an indication of work that has been invoiced but not yet delivered. This is a leading indicator of where revenue will come in.

For Q2 2023, bookings were down 14% year-on-year. In my opinion, it doesn’t seem like a growing business.

Then below I have cut out part of C3.ai’s cash flow statement.

What we can see is that deferred bookings or revenue from C3.ai has become a drag on cash flow over the past 6 months. When the business grows and bookings are strong, the business receives money upfront. And free cash flow has the potential to be very strong. And everybody is happy.

But when bookings dry up and deferred revenue becomes a cash use, it strains the company’s free cash flow. Even if C3.ai, Inc. significantly improves its cash burn profile, I expect its free cash burn for fiscal 2023 to be negative $200 million.

Valuation of AI shares – Difficult to estimate the fair value

In my previous post I said

[…] analysts who follow C3.ai are making what I think are overly aggressive revenue growth assumptions about how C3.ai’s next fiscal year will play out. Analysts estimate that C3.ai will grow its revenue next year by just over 20% CAGR.

Since I wrote these comments, analysts have actively downgraded their expected earnings outlook for C3.ai.

However, I still don’t believe analysts are looking at C3.ai, Inc. for what it really is.

C3.ai, Inc. is a company that, in the most favorable scenario, will grow around 10% to 15% CAGR in fiscal year 2024. And no more.

The essential

There are times in investing where you can be impressed by the sound of esoteric new concepts and emerging industries. But in reality, all we actually witness in C3.ai, Inc. is enough foresight to know exactly when to go public.

It was a time when zero rate businesses could discount their potential many years in advance. But it’s only when rates go up that we see who’s swimming naked. And you don’t need AI to know that.

However, it turns out for you, all the better.