C3.ai Q1 Beat: Wedbush Analyst Highlights Growth Potential in Generative AI

Wedbush analyst Daniel Ives maintained C3.ai Inc AI with an Outperform and lowered the price target from $50 to $42.

Last night, C3.ai delivered its Q1 results featuring top and bottom-line beats, which will be primarily overshadowed by gross margin weakness seen in the quarter and mixed guidance (solid top-line, softer margins) while noting that the company will no longer be non-GAAP profitable in 4Q as C3 doubles down on the current Generative AI opportunity. 

Total revenue came in at $72.4 million above the Street’s $71.6 million estimate, with subscription revenue coming in at $61.4 million vs. the Street’s $60.7 million estimate, pointing to the continued expansion of its opportunity pipeline with elevated demand for AI applications across industries. 

Non-GAAP gross margin came in at 68.6% below the Street’s 73.1% estimate as the company expects to witness continued short-term gross profit pressure due to higher cost of revenue for pilots during the customer buying cycle. 

The federal sector continues to show signs of strength with 39% growth in federal bookings as various government agencies, including the Chief Digital and AI Office and the Department of Defense, provide strategic advantages leading to over a dozen projects in the Beltway. 

While reiterating the vital pipeline for its AI suite with revenue for FY24 estimated to be in the range of $295.0 million - $320.0 million in line with the Street’s $308.2 million, the company lowered its operating income guidance to ($100.0) million - ($70.0) million, lower than prior guidance of ($75.0) million - ($50.0) million as C3 continues investing in lead generation, branding, market awareness, and customer success related to its Generative AI solutions. 

The company also mentioned that it does not expect to become non-GAAP profitable in FY4Q24 as it seizes the current market opportunity with increased investments in its Generative AI solutions. 

Ives said C3.ai is well-positioned to grab a significant portion of the Generative AI market through partnership expansion and market offerings with its proprietary suite of enterprise AI applications that continue to see an elevated pipeline with shortened sales cycles despite the murky macro backdrop with its successful consumption-based model. 

The analyst views the near-term heightened investment profile as near-term pain for long-term gain and speaks to the building pipeline c3 is seeing in the field. 

Ives projects FY24 revenue of $307.3 million (prior $305.7 million) and EPS loss of $(0.37) (prior $(0.14)).

Price Action: AI shares traded lower by 12.8% at $27.43 on the last check Thursday.