Should You Buy, Hold or Sell AI Stock Ahead of Q1 Earnings?

C3.ai AI is set to report its first-quarter fiscal 2025 results on Sep 4.

AI expects revenues of $84-$89 million for the fiscal first quarter. The Zacks Consensus Estimate for revenues is pegged at $87.12 billion, suggesting 42% growth from the figure reported in the year-ago quarter.

The consensus mark for the quarterly loss is pegged at 13 cents per share, unchanged in the past 30 days. AI reported a loss of 9 cents per share in the year-ago quarter.

C3.ai's earnings beat the Zacks Consensus Estimate in the trailing four quarters, with an earnings surprise of 49.18%, on average.

Let us see how things have shaped up for AI shares prior to this announcement.

Factors to Note for AI

C3.ai's fiscal first-quarter performance is likely to have gained from C3 Generative AI solutions and increased demand for its Enterprise AI software.

C3.ai's efforts to diversify its customer base and engage with clients across various industries, such as manufacturing, federal, defense, aerospace and pharmaceuticals, are expected to have contributed significantly to revenue growth. Its expanding federal footprint has been a key catalyst.

However, the ongoing transition to a pay-as-you-go consumption model has been resulting in smaller transactions of shorter terms, which is likely to have hurt revenue performance obligations despite an increase in revenues.

AI expects near-term pressure on the gross margin due to a higher mix of pilots, which are much costlier to acquire at the initial phase of the customer lifecycle. This is expected to have hurt the company's profitability in the to-be-reported quarter.

Additional investments in sales force, research and development, and marketing spending are expected to have hurt the operating margin.

AI Shares Underperform Sector

Year to date, AI shares have lost 18.7%, underperforming the broader Zacks Computer & Technology sector's return of 20.9% and the Zacks IT Services industry's appreciation of 5.3%.

Year-to-Date Performance

Image Source: Zacks Investment Research

The AI stock is overvalued at this moment, as the Value Score of F suggests.

The C3.ai stock is trading at a premium with a forward 12-month Price/Sales (P/S) of 7.04X compared with the sector's 6.27X.

P/S Ratio (F12M)

Image Source: Zacks Investment Research

The AI stock is trading below its 50-day and 200-day moving average, indicating a bearish trend.

AI Shares Trade Below 50-Day & 200-Day SMA

Image Source: Zacks Investment Research

C3.ai's Long-Term Prospects Ride on Strong Portfolio

C3.ai's expanding clientele and growing adoption of its Enterprise AI software are notable developments for investors.

C3 Generative AI is being used by manufacturing, industrial and military industries. It improves safety standards on production floors and equipment operations, and analyzes technical information, contracts and financial data.

The strong portfolio is helping in the growing use of AI solutions. C3.ai's AI-powered predictive maintenance solutions were selected by the likes of Dow, Holcim and Con Edison (one of the largest energy companies) in the fourth quarter of fiscal 2024.

Beyond innovation and product capability, C3.ai has leveraged strong sales capabilities through strategic partnerships with tech giants like Booz Allen Hamilton, Microsoft, Amazon and Alphabet.

C3.ai has been taking initiatives to expand its relationship with these cloud partners. It has now achieved AWS Generative AI competency, further deepening its relationship with Amazon.

C3 Generative AI for Government Programs, an advanced AI application, runs on Alphabet's Google Cloud. The application is designed to help federal, state and local governments efficiently deliver accurate information to the public about various government programs.

The latest solution is expected to strengthen AI's footprint in the federal space. In fiscal 2024, Federal revenues doubled year over year in fiscal 2024. AI closed 65 Federal agreements, up 48% year over year.

Conclusion

C3.ai's plan to invest aggressively to gain market share is expected to keep margins under pressure in the near term. Despite strong demand for C3 Generative AI solutions and an expanding partner base, this factor is expected to drag down the AI stock in the near term.

C3.ai currently has a Zacks Rank #3 (Hold), suggesting that it may be wise to wait for a more favorable entry point in the stock.

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