By Louis Juricic
C3.ai (NYSE:AI) has been one of the most popular artificial intelligence-related stocks this year, but its popularity has dwindled in recent weeks as some of the hype has dissipated. Shares declined from a peak of $34.68 in early April and now trade at just $20, well off the high, but still up year-to-date. If analysts at Wolfe Research are right, shareholders could face more disappointment.
Wolfe downgraded C3.ai from Peer Perform to Underperform today and lowered its price target on the stock to $14, implying 30% downside. Analysts warned of significant risks to revenue growth and cautioned that consensus estimates for revenue growth are about 10% too high.
“C3.ai is the best performing name across our entire software coverage up 79% YTD on the back of recent investor excitement surrounding AI. However, despite the recent outperformance in shares, we are updating our FY24 growth outlook to 11%, significantly lower than consensus at 20%, which we believe warrants downside to its current multiple of 7.2x EV/FY24 Sales on consensus estimates,” wrote the analysts.
They see C3.ai's transition to a consumption model as a drag to revenue growth. They also noted that AI entered a revised agreement with one of its major customers, Baker Hughes. This suggests growth from non-Baker Hughes-related revenues will need to be materially higher than what has been realized this year.
The analysts also think C3.ai's customer count suggests that either renegotiation of contract renewals is taking longer or that churn is increasing. This poses further risk to its ability to materially increase revenue.
“With our expectations for 11% revenue CAGR through FY25 and no FCF support, we value CY24 revenues on an EV/Sales multiple of 4.5x, at the midpoint of our Featherweight and Welterweight Growth comp groups, to arrive at our $14 PT, implying ~30% downside, and correspondingly downgrade AI to UP from PP previously,” they concluded.