Can this high-flying AI stock sustain its momentum and turn out to be a solid long-term investment?
Shares of C3.ai (AI 0.21%) shot up impressively in the past month thanks to the company's better-than-expected quarterly results. The pure-play enterprise artificial intelligence (AI) software provider is on track to take advantage of the huge end-market opportunity on offer in this space.
The stock surged 50% in February and analysts at Wedbush Securities expect the bull run to continue. The firm has raised its price target on C3.ai stock from $35 to $40, which points toward a 25% upside from current levels. But can C3.ai stock sustain its momentum for the next three years? Let's find out.
C3.ai's growth is picking up momentum
In the third quarter of fiscal 2024 (ended on Jan. 31, 2024), C3.ai reported an 18% year-over-year increase in revenue to $78.4 million. The figure exceeded the company's guidance range of $74 million to $78 million. For the current quarter, C3.ai is forecasting $82 million to $86 million in revenue, the midpoint of which is slightly higher than consensus estimates of $83.9 million.
The midpoint of this quarter's revenue guidance indicates that C3.ai's revenue could jump 16% year over year. That would be a nice improvement over the same quarter last year when its revenue remained almost flat on a year-over-year basis. Additionally, C3.ai has narrowed its revenue guidance range for the current fiscal year. It expects to finish the year with $308 million in revenue at the midpoint, which is slightly higher than the earlier forecast of $307.5 million.
The upgraded revenue guidance indicates that C3.ai's revenue in fiscal 2024 is on track to jump 15.4% from the previous guidance. That would be a major improvement over the 5.6% revenue growth it registered in fiscal 2023. C3.ai is witnessing an uptick in growth largely because its AI software solutions are gaining greater traction in the market.
The company provides ready-to-use AI applications, as well as an application development platform to help make custom enterprise AI applications. Last quarter, C3.ai struck 50 agreements for deploying its solutions, which was an increase of 85% from the year-ago period. Additionally, C3.ai started 29 new pilot projects in fiscal Q3, an increase of 71% from last year, suggesting that it could continue to win new business going forward.
It is also worth noting that 27 of the new agreements that C3.ai closed last quarter were made possible by its partner ecosystem. The company has made its enterprise AI applications available on leading cloud computing platforms such as Alphabet's Google Cloud and Microsoft Azure. C3.ai's current and potential customers can develop and deploy AI applications on these platforms, and the good part is that the company seems to be getting new business because of these partnerships.
C3.ai points out that its partner-supported bookings grew a whopping 337% year over year in the previous quarter. What's more, the company says that its pipeline of potential customers has increased by 73% year over year in the previous quarter. All this tells us why Wedbush has increased its price target on C3.ai. More importantly, C3.ai's potential revenue growth over the next couple of fiscal years shows that it could deliver impressive upside.
How much upside can the stock deliver over the next three years?
We have already seen that C3.ai is expected to finish fiscal 2024 with $308 million in revenue. More importantly, its revenue growth rate is expected to improve to 19% in fiscal 2025.
AI Revenue Estimates for Current Fiscal Year data by YCharts
Even better, analysts are forecasting a 21% increase in C3.ai's fiscal 2026 revenue as per the chart above. Assuming it can maintain this pace and record a 20% jump in revenue in fiscal 2027, its top line could increase to almost $535 million after three years.
C3.ai is currently trading at 13.4 times sales. While that's rich when compared to the Nasdaq-100 Technology Sector index's price-to-sales ratio of 8.4, C3.ai could continue to command a higher sales multiple because of an AI-powered acceleration in growth.
However, if we assume that C3.ai trades at a slightly discounted sales multiple of 10 after three years, its market cap could jump to $5.35 billion based on the projected fiscal 2027 revenue. That would be a 43% increase from current levels. But don't be surprised to see this AI stock deliver stronger gains.
The AI software market is expected to clock annual growth of 37% through 2030. This solid opportunity suggests that C3.ai's revenue growth could outpace expectations over the next three years and the market could reward it with a premium valuation. Its stock could soar substantially in the future as a result.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends C3.ai and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
