C3.ai Sees AI Momentum, Raises Guidance. Is It Time to Buy the Stock?

C3.ai (AI 3.16%) shares saw significant fluctuations following the release of the company's latest quarterly results. The movement in the stock price was likely puzzling for investors, as the stock initially soared during after-hours trading right after the earnings report, only to open the next day in negative territory before helping it rebound into positive territory.

Overall, the stock has experienced a robust performance since mid-November, increasing by approximately 45% year-to-date as of this writing, thus recovering from losses incurred earlier in the year.

In this article, we will delve deeper into the recent earnings report from C3.ai to understand the reasons for the stock's volatility and evaluate whether it may be a suitable time for investors to consider purchasing.

Subscription Growth and Guidance Analysis

For the fiscal second quarter of 2025, which ended on October 31, C3.ai reported a revenue increase to $94.4 million. The company has demonstrated a steady acceleration of year-over-year revenue growth over the past 18 months, rising from 11% in Q1 of fiscal 2024 to 21% growth last quarter and ultimately achieving 29% revenue growth in Q2.

Metric	Q1 '24	Q2 '24	Q3 '24	Q4 '24	Q1 '25	Q2 '25
Revenue growth (YOY)	11%	17%	18%	20%	21%	29%

Data source: C3.ai earnings reports. YOY = Year over year.

Total quarterly revenue exceeded the previous forecast of between $88.6 million and $93.6 million. Subscription revenue climbed 22% year-over-year, reaching $81.2 million.

C3.ai noted that if income from Baker Hughes is excluded, revenue would have surged by 41%. The company anticipates the possibility of extending its partnership with Baker Hughes, although it is deliberating on renewing its exclusive marketing agreement in the oil and gas sector when it comes up for renewal in June 2025. Revenue from Baker Hughes has steadily declined over the years, representing just 18% of total revenue for the quarter, down from 35% in fiscal 2023.

As part of its future strategy, C3.ai recently finalized a new partnership with Microsoft, set to last until March 2030. This deal enables all C3.ai solutions to be available on the Azure platform. Additionally, Microsoft sales representatives will receive commissions and bonuses on sales generated from the C3.ai integration with Azure. Microsoft will also facilitate C3.ai pilot programs and deployments on the Azure platform.

During the quarter, the company successfully closed 58 deals, including 36 pilots. These pilots are short-term contracts ranging from three to six months, allowing customers to test out C3.ai's services, paving the way for potential future contracts in production. C3.ai is also witnessing increased activity in the federal sector, with government agencies beginning to adopt AI solutions, particularly in defense and intelligence sectors.

Gross margin for the company came in at 61.3%, an improvement from the 56.1% recorded a year ago and up from 59.8% last quarter. The adjusted gross margin, which excludes stock-based compensation expenses, was around 70%. However, subscription gross margin was lower at 56.8% for the quarter, compared to 53.5% a year earlier.

C3.ai reported an adjusted earnings-per-share (EPS) loss of $0.06, improving slightly from a $0.13 loss reported a year ago. After registering free cash flow of $7.1 million in Q1, the company recorded a negative free cash flow of $39.5 million during this quarter. Previously, C3.ai had forecasted being free-cash-flow-positive for the year but has since stated that it will invest further in its partnership with Microsoft instead.

Despite the fluctuations in cash flow, C3.ai ended the quarter with $730.4 million in cash and marketable securities, and it has no debt obligations.

The company has provided guidance for fiscal Q3 revenue to be in the range of $95.5 million to $100.5 million, signifying growth of 22% to 28%. Additionally, it has raised its full-year revenue forecast from between $370 million to $395 million to a new estimated range of $378 million to $398 million.

Assessing Whether To Buy C3.ai Stock Now

The standout aspect of this quarter for C3.ai was undoubtedly the potential impact of the Microsoft partnership, which may be a significant turning point for the company. However, it remains essential to observe the actual effects of this deal, as similar agreements do not always yield favorable results. The timing of this partnership is crucial, especially as the Baker Hughes partnership is uncertain and its associated revenue is declining.

On another note, C3.ai is incurring high costs in stock-based compensation. For the initial six months of the fiscal year, stock compensation amounted to $111.7 million, with total revenue at $181.6 million. Over the past year, the company's share count has risen from 119.9 million to 129.1 million, marking a 7.7% increase attributed to this elevated stock compensation. Moreover, the company's margins are considerably weaker compared to other software-as-a-service (SaaS) companies.

From a valuation perspective, C3.ai has a forward price-to-sales (P/S) ratio of approximately 12, based on the current fiscal-year analyst projections.

Considering the uncertainties with the Baker Hughes partnership, the hefty stock compensation practices, and the overall weak margins across the industry, the current valuation of C3.ai does not appear particularly appealing at this moment. Thus, despite the company's progress, it may not be wise for investors to pursue the stock aggressively after its significant price increase this year.

Geoffrey Seiler is not invested in any of the mentioned stocks. The Motley Fool has positions in and recommends Microsoft. The Motley Fool also recommends C3.ai and suggests some options such as long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has its own disclosure policy.

C3.ai, Microsoft, Investing