Expanding Partnerships With Microsoft And AWS Will Widen AI Market Presence

Key Takeaways

• Strategic alliances with major partners and integration with global sales infrastructures are expected to accelerate revenue growth and increase subscription revenue.
  
• Focus on generative AI and efficient expense management positions C3.ai for market expansion, improved product offerings, and potential earnings enhancements.
  
• Continuing financial losses and reliance on strategic partnerships pose significant risks to C3.ai's profitability, cash flow, and revenue growth amidst geopolitical uncertainties.

Catalysts

Operates as an enterprise artificial intelligence (AI) software company in North America, Europe, the Middle East, Africa, the Asia Pacific, and internationally.

• The expansion of strategic alliances with major partners like Microsoft Azure, AWS, and McKinsey QuantumBlack has significantly increased sales reach and shortened sales cycles, which is expected to accelerate revenue growth and enhance operational efficiency.
  
• The integration with global sales infrastructures of partners like Microsoft and AWS, and these solutions being orderable on major cloud platforms, is likely to lead to a substantial increase in subscription revenue and faster contract initiation.
  
• The focus on generative AI and agentic AI, with continued innovations and customer traction, positions C3.ai to address a larger market and enhance its product offering, impacting future revenue streams positively.
  
• The substantial increase in joint sales pipelines and a disciplined data-driven approach in target accounts are expected to drive significant revenue growth as these opportunities start converting into closed deals.
  
• The reduction in operating losses due to efficient expense management and the expectation to achieve free cash flow positivity in the near term suggest potential improvements in net margins and overall earnings.

C3.ai Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming C3.ai's revenue will grow by 31.2% annually over the next 3 years.
• Analysts are not forecasting that C3.ai will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate C3.ai's profit margin will increase from -76.8% to the average US Software industry of 12.1% in 3 years.
• If C3.ai's profit margin were to converge on the industry average, you could expect earnings to reach $99.8 million (and earnings per share of $0.63) by about April 2028, up from $-281.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 61.1x on those 2028 earnings, up from -10.1x today. This future PE is greater than the current PE for the US Software industry at 30.2x.
• Analysts expect the number of shares outstanding to grow by 6.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.37%, as per the Simply Wall St company report.

C3.ai Future Earnings Per Share Growth

Risks

• C3 AI's non-GAAP operating loss, despite improvement, remains significant ($23.1 million), indicating ongoing challenges in achieving profitability, which could impact net margins and investor confidence.
  
• The company's expectation to remain free cash flow negative for fiscal '25 due to increased investments suggests that near-term financial health may be affected, impacting earnings and operational liquidity.
  
• C3 AI's reliance on strategic partnerships like those with Microsoft and AWS may heighten execution risks; any faltering in these alliances could hinder revenue growth and market expansion.
  
• The increase in demonstration licenses performance could signify a dependency on incentivizing partners rather than direct growth, potentially impacting revenue predictability and sales processes.
  
• Fluctuating geopolitical factors and potential global trade issues, as noted in the call, could have unforeseen adverse consequences on business results, affecting revenue stability and growth projections.

Valuation

• The analysts have a consensus price target of $30.999 for C3.ai based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $56.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $827.8 million, earnings will come to $99.8 million, and it would be trading on a PE ratio of 61.1x, assuming you use a discount rate of 7.4%.
• Given the current share price of $21.43, the analyst price target of $31.0 is 30.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.