An analyst downgraded popular artificial intelligence company C3.ai on Monday, citing growth concerns that could weigh on the impressive run for the AI stock this year.
Wolfe Research analyst Joshua Tilton says the transition to a consumption-based pricing model will be a drag on sales. Further, a newly restructured agreement with oil field services company Baker Hughes means C3.ai will have to step up its other revenue sources to meet fiscal year 2024 expectations.
The company's initial outlook implies 30% revenue growth and operating profitability in 2024. Analysts polled by FactSet project a lower 19% sales growth and still call for per-share losses for the fiscal year that ends in April 2024. Tilton says both projections are too high. He calls for just 11% growth in sales.
"We remain cautious and believe near-perfect execution and rates of adoption from new customers onto its consumption-based model are required to achieve this, in addition to significantly higher levels of non-Baker Hughes related revenues," he said in a note to clients.
On today's stock market, AI stock skidded 11% and closed at 17.85.
AI Stock: Consumption Pricing Leads To Downgrade
AI stock has already had a tumultuous April. A short seller recently raised concerns about the company's unbilled receivables and margins from Baker Hughes. Later, shares bounded higher after the company responded to the claims.
But the downgrade Monday sent AI stock farther below its 50-day line, according to MarketSmith.com. Tilton cut his rating on shares to an underperform rating from peer perform. He has a 14 price target on C3.ai stock. He sees three core risks facing the company.
The company is in the midst of a transition to consumption-based pricing, which will allow customers to only pay for their actual usage of a product. Tilton sees that as a problem for C3.ai.
"Our conversations with (chief information officers) and myriad software companies suggests that budgets are pressured by a negative macro outlook and that consolidation of spend on software remains a top priority, which in our view threatens the uptake of C3.ai's newly introduced consumption model," he said.
New Baker Hughes Deal
Further, the company recently revised its agreement with Baker Hughes. Based on the new deal, Tilton says revenue from non-Baker Hughes contracts will need to grow more than 28% in fiscal year 2024 to hit the 20% revenue growth projected by Wall Street.
That "would be the largest increase recorded on a year-over-year basis by our estimates," he said.
Complicating matters for AI stock, Tilton says customer count suggests renegotiation of contract renewals is taking longer, or that churn is increasing. This could hurt non-Baker Hughes revenue.
The next big catalyst for AI stock will be its earnings report. The company's current quarter and year will end April 30.
Despite the tumble this month, AI stock still has a strong Relative Strength Rating of 95. This puts shares' performance over the past 12 months in the top 5% of all stocks, according to IBD Digital.
Follow Allison Gatlin on Twitter at @IBD_AGatlin.
