C3.ai (AI 0.08%) has seen a faster rate of growth over the past several quarters thanks to its connections to artificial intelligence (AI). Its business is focused on providing turnkey AI solutions to businesses, and it believes it can simplify AI adoption for companies looking to take advantage of next-gen technologies.
C3.ai’s latest quarterly update on earnings is scheduled for release on Dec. 9. What the report says will likely play a key role in determining where the stock goes in the weeks and months that follow.
While timing the purchase of a stock to a single event is not all that important for investors with a long-term buying strategy, it is true that buying stocks at a discount can improve the eventual overall return. Quarterly reports do sometimes impact a stock’s price, so timing a purchase can play a role, but it shouldn’t be the deciding factor in whether or not to buy.
With that said, should you buy the stock before C3.ai releases results for the recently completed quarter?
C3.ai’s revenue has been accelerating
It has been a volatile few years for C3.ai’s business as it managed through a sharp slowdown in 2022. However, the business got a nice boost in late 2022 with the release of OpenAI’s revolutionary upgrade of its ChatGPT generative AI chatbot. The excitement that built up around ChatGPT and around AI, in general, sparked the company’s growth. C3.ai is back to growing at year-over-year rates in excess of 20%.
AI Operating Revenue (Quarterly YoY Growth) data by YCharts
For the just-completed quarter, C3.ai projects its revenue will come in between $88.6 million and $93.6 million. At the midpoint, that would suggest a growth rate of approximately 24%, indicating a further acceleration for the business’s top line.
Hitting that guidance will be key in not only pleasing growth investors, but also potentially getting the business closer to breakeven. In the past, the company’s CEO referred to profitability as a “mathematical certainty” that would come with scaling its operations.
The bottom line may be what’s keeping C3.ai stock down right now
While there’s little doubt that the business is experiencing significant growth, the one big problem with C3.ai is that it isn’t achieving that growth in a sustainable way. While top-line growth is great, the company needs to show that it’s making progress toward profitability. A top AI stock such as Nvidia has been a fantastic investment because not only has it been generating massive revenue growth, but its earnings have also been taking off. That isn’t the case with C3.ai.
AI Net Income (Quarterly) data by YCharts
Although the company has made some progress in shrinking its losses, it still has a long way to go in getting to breakeven. How well it performs on the bottom line may be much more important for C3.ai in generating more bullishness surrounding its business than just sheer revenue growth.
For the company to prove its doubters wrong — and there are a lot of them, with short interest as a percentage of float coming in at more than 23% — it’ll need to demonstrate it can make significant progress with respect to earnings. If it doesn’t, there could be a sell-off around the corner.
Why C3.ai is still too risky of a stock to own right now
If C3.ai’s business starts to show signs of slowing down next quarter and its earnings haven’t shown a meaningful improvement, investors could quickly dump the stock. That’s because if C3.ai fails to make significant progress on the bottom line at a time when conditions should be ideal for the business to grow, the outlook will no doubt worsen as the economy slows down and companies potentially scale back on some or all of their AI-related expenditures. Should that happen, C3.ai could be among the many AI stocks that growth investors could quickly become very bearish on.
Waiting on the sidelines until after earnings (and perhaps even longer than that) before deciding whether to buy the stock may not be all that exciting, but it’s the safer, more prudent approach to take, especially with C3.ai. The stock has done well this year and it’s up 35% as of Monday, but there are still too many question marks surrounding the business to make it a safe investment to hang on to for the long haul.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
