Artificial intelligence software company C3.ai (NYSE:AI) reported Q4 2021 results on June 3 that were slightly ahead of analyst expectations. However, its subscription revenues only grew by 17% during the quarter, prompting many owners of AI stock to head for the exits.
Since it announced its results, its share price has lost 18% of its value and sits within $1.50 and heading into the $50s.
If you want to make money on its stock over the next 18 to 24 months, I suggest you buy it should this happen. In the mid-$50s, AI stock is an outright buy.
C3.ai is Thrashing Around
If you were one of the investors who abandoned the ship after the company reported earnings, you shouldn’t feel guilty. CEO Tom Siebel, who knows a thing or two about tech businesses, stated during its Q4 2021 conference call that “[W]e’re kind of thrashing around quarter to quarter.”
He was trying to point out that the timing isn’t perfect. For example, subscription revenue expected in the fourth quarter might come in the first or even second quarter. So it’s not an exact science.
So, to make your entire investment in the AI business on black and white subscription numbers seems extremely shortsighted. C3.ai is a business that could take several years to become profitable. The difference between 17% and 22% subscription revenue growth in a single quarter isn’t that big a deal if you’re expecting five years of 20%+ growth in sales. It’s just not.
As I said in my April article about the company, I see its growth trajectory as just right. It’s much easier to manage a business growing at 20% a year than growing at 50% annually.
It might not seem like a big difference, but if two businesses start with $100 million in annual sales and one compounds at 20% growth and the other at 50%, by the end of five years, the latter’s sales would be $511 million higher at $759.4 million.
However, to get to that number, it would likely experience a much higher level of expenses and bigger losses.
So, if you think the subscription revenue miss in Q4 2021 caused an 18% correction in its share price, imagine what would happen if investors were expecting 50% growth in Q4 2021, and it came in with 17% instead?
We’d be looking at a share price in the $40s, not $60s.
Realistic Expectations Will Get AI Stock Back to $100
C3.ai went public on Dec. 8, 2020. On its first day of trading, it jumped as high as $115 before finishing the day up 120.2%, at $92.49. It then closed above $100 every day until March 2, when it closed at $98.50.
In that three-month run, AI stock got as high as $183.90 on Dec. 23, the penultimate day of trading before Christmas. From there, it dropped to a low of $47.22 on May 13. If you bought some at the high and sold at the low, you’d have lost 74% of your investment.
Fortunately, when it comes to investing, market timing isn’t usually that precise in either direction. That said, I feel for the investors who bought Tom Siebel’s story in the $100s.
It’s not that the story’s a bad one. It’s just that expectations got ahead of themselves. It’s going to take a while to get there, but it will, because now that it’s past the major lock-up expiry on June 7 – a major headwind for tech IPOs – all it has to do is focus on the future.
On June 9, C3.ai announced a partnership with Snowflake (NYSE:SNOW) to deliver next-generation enterprise AI applications at scale. Here’s Christian Kleinerman, Snowflake’s senior vice president for products:
The C3 AI Suite and C3 AI’s pre-built enterprise-grade models significantly speed and simplify the development of enterprise AI applications. As our customers deploy enterprise AI applications at scale, our seamless integration with C3 AI to Snowpark will accelerate the development and deployment of complex AI and machine learning use cases.
It all sounds inspiring. But again, investors have to temper their expectations. As obvious as AI is for business success, the uptake remains surprisingly muted.
Investor’s Business Daily reported on the company’s Q4 2021 results on June 3. Included in the commentary was a quote from Deutsche Bank analyst Patrick Colville to his clients.
“This set of results supports our view that the artificial intelligence market in the enterprise remains nascent, with companies slow to expand AI use beyond initial pilots and science projects,” IBD reported Colville stating.
Translation: We’re not there just yet. AI across everyone’s universe will have to wait for the thinking in the C-suite to catch up with reality.
The Bottom Line
In fiscal 2020, the company’s subscription revenues had an 80% gross margin, 300 basis points higher than a year earlier. It lost $11.2 million less from its operations this past year despite a 16% increase in overall subscription revenues. Also, it used 39% less cash from operating activities in the past year.
The business is headed in the right direction.
And, as Tom Siebel stated in the conference call, subscription revenues remained around 86% of its overall sales in 2021. So it didn’t lose ground despite a challenging work environment.
Everything about this business seems positive right now despite analyst expectations. In 18 to 24 months, I’m confident a buy in the $50s will look like a big lottery win.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.