C3.ai Stock, AI, Drops 25% On Sales Forecasts – Worse To Come?

C3.ai (NYSE: AI) stock is down 25% premarket on the back of its results and trading update announcement after the close last night. The problem isn't in fact the results themselves, for while the loss widened it was still an earnings beat. No, the problem is forecasts of sales in 2023 (which, for C3.ai, confusingly begins now) which are below expectations. And missing growth forecasts when you're rated as a growth company doesn't do good things to a stock price. The big question therefore is how far this rerating is likely to go?

The actual results for Q4 were not that bad. Expectations were that there would be a loss and that was less than expected – at minus $0.21 on a non-GAAP basis that's actually a beat of $0.08. Gross profit was 42% upon YonY comparing the quarters. Revenue was up by 38% to a $1.04 million beat of expectations. All of this we would expect to lead to an uptick in the C3.ai stock price. The price before the results was based on what we all thought results would be, the results were better, the price should move up, right?

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Except when you're rated as a growth stock that's not quite how it does work. Future growth prospects have much more influence upon the stock price than actual past results do. That's simply inevitable when we are talking about 30 and 40% growth rates. There the news is not so good. The current forecast is of revenues for fiscal 2023 in the $308 to 316 million range, against estimates of $339.6 million.

C3.ai should be hitting all the right buttons perhaps. For it's in AI – very fashionable. It's also in enterprise software, which has made more than a few fortunes, and its offerings are software as a service, SaaS, which is also terribly fashionable. That last also makes sense, as subscription revenue is more highly valued by the market than licence sales – the regularity of income itself has a value.

However, like near all software development there are high capital costs – even if we might expense software development, it's still really a capital expenditure – and it's the last and marginal customer that makes the profit, For the marginal cost of servicing that marginal customer approaches zero. Thus it's necessary to have sales high enough to cover development costs, then anything after that is near pure bunce of profit. Which is great – but only if you can actually grow revenues to where they more than cover development and deployment costs. Which is something that C3.ai hasn't managed to do as yet.

Thus that desire for high growth of course – so that revenues will, at some near and timely point, finally be larger than the cost base. Which is why the C3.ai stock price has taken such a dent from an earnings beat but a future revenue downgrade. It puts off, ever further into the future, that turnaround point to decent profit levels.

As to what's going to happen to the price from now, well, ex-growth stars do find it difficult to regain their growth rating. The stock price performance over the past year, from high $70s to today's $14 or so doesn't inspire confidence. 75% down isn't a good look really. Until revenues start to really motor above that cost base it's unlikely there's going to be a considerable improvement perhaps.