C3.ai (NYSE:AI), a developer of artificial intelligence (AI) software, started 2021 with such promise. After coming public on Dec. 8, 2020, at $42 a share, AI stock finished its first day of trading up more than 120% at $92.49.
Over the following three weeks, C3.ai’s share price peaked at $183.90 a piece. It had another surge in mid-February when it hit a now-52-week high of $176.94. It’s been a gradual ride down to below its IPO price ever since.
C3.ai appeared to have growth, an excellent CEO and founder in Tom Siebel and a product offering in one of the hottest technology areas. Yet, investors ran away from the company’s stock over most of 2021.
To get back to $100 or higher, it’s got to reignite its growth story. The million-dollar question is whether it’s got the right stuff.
I Was Sold on AI Stock
I haven’t written about C3.ai since early July. So, as is apt to happen when you’re not writing about a particular company very much, you tend to lose track of its share price, etc.
Naturally, when asked to cover AI stock for this article, I first checked out its share price. I was shocked to see how far it had fallen since July 2, 2021, when I wrote,
“I’m on record [June 14, 2021] stating that if you can buy AI under $60, you should. Now trading around $61 as of time of publication, it wouldn’t shock me to see it above $70 in short order. Certainly, the partnership with Singtel shows C3.ai is making great strides within large organizations.”
The Singtel partnership mentioned above was announced in June last year. It would deliver enterprise AI solutions in Southeast Asia with Singapore-based NCS, a provider of end-to-end information, communications, and technology (ICT) and digital solutions.
Announcements like the one above convinced me it was an outright buy in the mid-$50s. As tech IPOs went, I thought the pathway to profitability for C3.ai was real. Therefore, Siebel would ultimately reward long-term investors for their faith in the CEO and the rest of its management team.
What Happened to Dampen the Enthusiasm?
When C3.ai delivered second-quarter 2022 results on Dec. 1, revenue in the period rose 41% year-over-year to $58.3 million. That exceeded both management’s guidance and analysts’ expectations. In addition, it finished the end of October with remaining performance obligations (RPO) of $529.3 million — the contracted revenue for future periods — up 74% YOY on a non-GAAP basis.
That’s a sign the business is still very much in growth mode.
On a non-GAAP basis, it lost $23.6 million during the quarter, up from a $9.7 million loss a year earlier. The losses were not unexpected. As I said last July, it could lose money for several years. At the same time, it raised its fiscal year 2022 full-year guidance to 36% at the midpoint of its outlook, up from 17% growth in fiscal 2021.
That’s was good news.
The bad news, as The Motley Fool’s Danny Vena argued in early December, is that if you exclude its Baker Hughes (NASDAQ:BKR) business — C3.ai announced in its Dec. 1 press release that its expanded strategic relationship would add at least $357 million in revenue over the next three-plus years — C3.ai saw a 16% sequential decline in RPO from Q1 2022.
Puzzled by the Math
How did Vena come up with this figure? I’m not quite sure.
In Q2 2022, the company had $523.9 million (non-GAAP) in RPO. In Q1 2022, it was $357.3 million. That’s a sequential increase of 47%. However, a 16% decrease from $357.3 million puts its Q2 2022 RPO at $300.1 million, $223.8 million less than its reported non-GAAP figure.
According to C3.ai’s Q2 2022 10-Q filing (p. 33), in describing its “Grow Our Go-to-Market and Partnership Ecosystem,” Baker Hughes has already met its $75 million minimum revenue commitment for fiscal 2022. Above and beyond its minimum annual commitments, it is paid a sales commission for any additional revenue it generates selling C3.ai’s software to other customers. In the first six months of the year, it’s earned $16 million in sales commissions.
So, at the end of October, its RPO related to Baker Hughes was $18.7 million in deferred revenue and $282.3 million in commitments from non-cancellable contracts. That adds up to $301.0 million. Do the same in Q1 2022, and you get $204.4 million.
If you back these numbers out, it becomes a non-GAAP RPO of $222.9 million for Q2 2022 and $152.9 million in Q1 2022, a growth rate of 46%.
I’m at a loss to understand his 16% sequential decline.
C3.ai had 98 customers, including Baker Hughes, at the end of July. By the end of October, it had 104 customers, or 6.1% sequential growth.
Yes, Baker Hughes is a big chunk of its business. However, five years from now, it will account for a much smaller piece of C3.ai’s pie than it does today.
The Bottom Line
The lowest price target from the 10 analysts covering AI stock is $31. The highest is $103. The average is $51.89, almost double where it’s currently trading.
Unless I’m missing something, the Baker Hughes annual commitments guarantee that the business grows each year through April 2025, regardless of what it does with its other 103 customers.
That’s an excellent position to be in as far as I’m concerned. Ultimately, I think investors will come around to this point of view.
In the meantime, take advantage of any further dips that occur due to worries C3.ai’s sales force isn’t getting the job done. It is.
C3.ai remains a long-term buy despite its 79% decline over the past year. In my opinion, it’s growing plenty.
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.