To The Moon

$C3.ai, Inc.(AI)$

Over the past month, C3.ai shares have gained 1.9%, lagging behind the broader Zacks S&P 500 composite, which rose 3.9%. Meanwhile, the Zacks Computers – IT Services industry, to which C3.ai belongs, has climbed 4.2% during this period. The key question now is: Where is C3.ai stock headed next?

C3 AI provides artificial intelligence solutions to enterprises to enhance their operations. While its offerings are similar to those of Palantir, they operate on a smaller scale. The company is set to report its quarterly financial results after the market closes on Wednesday, February 26, 2025. Investors are now debating whether they should buy C3 AI stock ahead of the earnings announcement.

In this article, I’ll answer that question, preview what investors should watch for in C3 AI’s earnings report, and share my discounted cash flow model to reveal the stock’s intrinsic value. Let’s dive in.

C3 AI’s Accelerating Revenue Growth

One of the most impressive aspects of C3 AI’s performance has been its accelerating revenue growth over the past two years. Looking at its fiscal year 2023 fourth quarter, revenue was flat, showing no growth. However, since then, revenue has steadily increased—rising 11% in Q1 2024, 17% in Q2, 18% in Q3, and 20% in Q4.

So far in fiscal year 2025 (which differs from the calendar year), this trend has continued, with growth accelerating to 21% before jumping to 29% in the most recent quarter.

C3 AI has adopted a strategy similar to Palantir’s, where it approaches enterprises and offers to demonstrate its capabilities for free. The company only asks for payment once the client sees tangible results, such as cost savings, revenue gains, or reduced risk. This approach has proven highly effective, as businesses are more inclined to invest in the service after witnessing real-world benefits.

Media coverage or speculation about major business changes can temporarily impact a stock’s price, but long-term performance is ultimately driven by fundamental factors.

We place significant emphasis on earnings estimate revisions. The reasoning is straightforward: A company’s fair value is determined by the present value of its future earnings. When analysts revise their earnings projections upward, a stock’s fair value rises, attracting more investors and pushing the stock price higher. Empirical research has shown a strong correlation between earnings estimate trends and short-term stock price movements.

For the current quarter, C3.ai is expected to report a loss of $0.25 per share, reflecting a steep decline of 92.3% from the year-ago period. Over the past 30 days, this estimate has remained unchanged.

Looking at the full fiscal year, the consensus estimate projects a loss of $0.63 per share, a year-over-year decline of 34%. This figure, too, has remained steady over the past month. However, for the next fiscal year, analysts anticipate an improvement, forecasting a loss of $0.54 per share, which would mark a 13.2% improvement from this year’s expected results.

Considering these trends, C3.ai currently holds a Zacks Rank #3 (Hold), reflecting a neutral stance based on earnings estimate revisions.

Stock Performance & Valuation

Despite these strong results, C3 AI’s stock price has only increased by 9.85% over the past year. Typically, when a software-as-a-service company demonstrates consecutive quarters of accelerating growth, its share price surges. However, in C3 AI’s case, the stock was already trading at a premium valuation due to the AI investment hype.

Companies like SoundHound AI, BigBear AI, and even Palantir have also been valued at high multiples, often before delivering results. This means that when strong earnings reports are released, the positive news is already priced in, limiting stock price gains.

This highlights why valuation is crucial. A great business can still be a poor investment if it’s overpriced. While C3 AI was significantly overvalued a year ago, it has since grown into its valuation. Even so, the stock remains expensive, currently trading at a forward price-to-sales ratio of 82.

Based on my discounted cash flow valuation model (as of February 8, 2025), I estimate C3 AI’s intrinsic value per share at $328, compared to its market price of $315. This suggests the stock is fairly valued or slightly overvalued, depending on which valuation metric you consider.

Revenue Growth Projections

While earnings growth is crucial, revenue growth serves as a key driver of a company’s long-term profitability. A business cannot sustain profit increases over time without expanding its revenue base.

For the current quarter, analysts expect C3.ai to generate $97.97 million in revenue, representing a 25% increase year-over-year. Looking ahead, full-year revenue estimates stand at $388.16 million for the current fiscal year (+29.6%) and $478.96 million for the next fiscal year (+23.4%).

Earnings Outlook & Risks

Looking ahead to its upcoming earnings report, C3 AI has forecasted 25% revenue growth at the midpoint—down from the 29% growth it achieved last quarter. If this slowdown materializes, it would mark the end of its streak of accelerating revenue growth, which could be disappointing for investors.

Additionally, C3 AI has a history of issuing conservative guidance (or “sandbagging”) to beat expectations. While this strategy may generate positive headlines, I’m not a fan of it. I prefer companies that provide accurate forecasts rather than consistently lowballing estimates just to exceed them.

For this reason, I believe the downside risks outweigh the potential upside leading into earnings. If C3 AI reports results that fail to exceed the market’s already-adjusted expectations, the stock could face a sharp decline. We saw a similar situation last week with The Trade Desk, which also has a reputation for sandbagging. When it failed to surpass even its conservative guidance, the stock dropped nearly 30%.

In its most recent earnings report, C3.ai posted revenue of $94.34 million, reflecting a 28.8% increase from the prior year. The company also reported an EPS loss of $0.06, improving from a loss of $0.13 in the same period last year.

Notably, these results exceeded expectations. Revenue came in 3.66% above the Zacks Consensus Estimate of $91.01 million, while EPS beat expectations by 62.5%. C3.ai has consistently outperformed analyst estimates over the past four quarters on both revenue and earnings metrics.

Valuation Considerations

No investment decision is complete without evaluating a stock’s valuation. Assessing whether a stock’s price aligns with its intrinsic value and growth potential is critical in determining its future performance.

One way to gauge valuation is by comparing key multiples—such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF)—against both historical values and industry peers.

C3.ai currently holds Value Style Score of F, indicating that it trades at a premium relative to its industry peers. This suggests the stock may be overvalued at its current price.

Should You Buy C3 AI Before Earnings?

Given these risks, my recommendation is to wait. It’s wiser to let the earnings report come out, analyze the results, and then decide whether to invest.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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