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C3 AI, the enterprise artificial intelligence company, reported quarterly financial results that are sending the stock price soaring by over 20%. I'm going to talk about the reasons why the stock price is soaring, and I'm going to update my recommendation for C3 AI stock, letting you know if I think the stock is a buy, hold, or sell following these quarterly financial updates. So, let's take a look.
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One of the things investors are really liking about C3 AI in recent quarters is the second derivative growth. What I mean by that is not just the rate of revenue increase, but that the rate of increase is increasing. You can see this for several consecutive quarters, starting in the fourth quarter of fiscal year 2023, where the company's growth rate was flat, meaning no growth, then increasing to 11%, 17%, 18%, 20%, and 21%. So, you can see that incrementally, the rate of increase is getting faster, and investors love to see that. I love to see that. That means the company's demand for its products is increasing at an increasing rate, and that foretells great prospects in the near term and the medium term as well.
If you've already read my book, you'll know that one of the six steps in my investing framework is the customer value proposition. How valuable do customers feel your products are? Do they feel like they're getting a good deal with the money they're spending with your business? One of the ways you can measure that is with the net promoter score (NPS). According to C3 AI, their net promoter score is among the highest among some of these large tech companies. They say that their net promoter score is 61, whereas one of their competitors, Palantir, which is considered best-in-class service in its category, shows a score of 33. They also mention Snowflake at just 40. The last time I checked, Snowflake's net promoter score was around 70. The data on this is a little bit murky, and companies can have different results for different time periods, so it's just one measure I use among others to determine customer value. The other one, of course, is revenue growth. That's the most obvious one. If customers feel like they're getting good value from your product, they're going to be spending more money, and your revenue growth will be increasing. We saw that already with C3 AI.
A couple of data points here suggest that the customer value proposition for C3 AI is strong. I like this breakdown of C3 AI's revenue growth and the several metrics that combine to return this revenue growth. You'll see here that the growth rate is accelerating from the fourth quarter of 2023. Even before that, in the quarter prior, they were negative year-over-year in revenue growth. So, they've got six consecutive quarters of accelerating revenue growth. That's tough to do, and C3 AI is managing this difficult business accomplishment. One of the ways they're doing that is by offering their product at a lower price point. You can see the average selling price here in three of the four quarters of 2023; the average selling price was over $1,000, approaching $1,900 in one quarter. However, in the recent quarters, the average selling price for four out of the last five quarters didn't increase above $900, with only one quarter at $1,200. They were able to offer their products at lower prices while, at the same time—I'm going to share with you a little later—they're able to increase cash flow from operations, even though they're generating lower average selling prices.
The remaining performance obligations (RPO) eventually turn into revenue. These are contracts the company has signed that will eventually turn into revenue. This is one of the things that was not so great about the company's performance. You can see this RPO decreasing over several consecutive quarters now, with declining RPO. This could signal that revenue growth could slow down in the future if the company doesn't accelerate or stop the decline in RPO and sign new contracts to replace existing contracts that it's servicing. When C3 AI services a contract, the RPO decreases. So, when they first sign a contract, it goes into RPO, and then when they deliver the service, that RPO goes into revenue, and the RPO decreases while revenue increases. If you don't get new contracts, your RPO will continue decreasing as you service those contracts. You've got to sign new contracts so that you can continue your RPO and avoid a slowdown in revenue. Eventually, if RPO keeps falling, you won't have any contracts to service, and your revenue will decrease.
Looking ahead, the company expects the good times to continue, with forecasts for continued revenue growth acceleration. At the midpoint, they're forecasting revenue growth of around 25%, which would be an increase from the previous quarter, where they just completed revenue growth of around 21%. For the full year in 2025, they are forecasting revenue growth of 23% at the midpoint, which would be an acceleration from the previous year as well. So, management expects revenue growth prospects to continue. They are optimistic about the business prospects going forward, not just for the next quarter but for their full year, which right now is their fiscal year 2025. I know it's annoying; companies are allowed to have fiscal years that are different from calendar years. That's why C3 AI is in the second quarter of their fiscal year 2025, even though we're in the fourth quarter of calendar year 2024. It's annoying, but they are allowed to do that.
C3 AI is still losing money on the bottom line, but they are forecasting when they expect to be profitable on a non-GAAP basis. If revenue continues to grow at the rate it's increasing, they expect their expense growth to slow compared to revenue growth, and the lines to converge, leading the company to be profitable on a non-GAAP basis. This looks like it will happen in a couple of quarters ahead. If the growth rate continues, they do expect that profitability on the bottom line will be achieved over the next few quarters.
Lastly, one of the other things investors really liked about C3 AI was that cash flow from operations more than doubled in the three months that ended July 31st. The company's cash flow from operations increased to $8 million, up from $3.9 million in the same quarter last year. Unsurprisingly, C3 AI stock is up over 25% following these positive results, and the stock price is now trading at a forward price-to-sales ratio of 9.15, the most expensive it's been since April of this year.
I've had this stock rated as a hold all year long in 2024. I last updated that on September 4th, and following these results, I think it's a big step forward for C3 AI. However, the valuation also increased by over 20% to compensate for the fact that they made a big improvement. So overall, I'm keeping the stock rated as a hold while admitting that it is getting closer to being rated as a buy if the company continues making this type of progress in the business.
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