C3.ai's Growth Fueled by Microsoft Partnership and AI Developments

On Monday, C3.AI Inc (NYSE: AI) announced its second-quarter revenue of $93.34 million, surpassing the analyst consensus of $91.02 million. The company recorded a quarterly earnings per share (EPS) loss of 6 cents, also beating analyst expectations of a 16 cents loss.

Following this report, analysts upgraded their ratings on the stock, with several increasing their price targets.

Related Read: C3.ai Stock Rallies After Q2 Results, ‘Seventh Consecutive Quarter Of Accelerating Revenue Growth’

JMP Securities analyst Aaron Kimson maintained a Market Outperform rating on C3.ai and raised the price target from $40 to $55.

Needham analyst Mike Cikos reiterated a Hold rating for C3.ai, while JP Morgan analyst Pinjalim Bora maintained a Neutral rating with a price target increase from $19 to $28.

According to JMP Securities: While C3.ai still faces some challenges, particularly its reliance on Baker Hughes—which contributed about 20% of the revenue forecast for fiscal 2025—Kimson believes in the company's potential. C3.ai has experienced seven consecutive quarters of accelerating revenue growth and it provides a wide range of AI applications in diverse sectors such as manufacturing, defense, government, and oil and gas. The company's expertise in AI is evidenced by a newly acquired patent that enhances its market position significantly.

C3.ai has entered into a comprehensive new six-year partnership with Microsoft Corp, designating C3.ai as a preferred AI application partner on Azure. This partnership enables Microsoft customers to purchase C3.ai applications directly through the Azure Portal, streamlining the contracting process.

Moreover, the company is working on reducing its revenue dependency on Baker Hughes, which accounted for 35% of its revenue in fiscal 2023. This dependency was expected to decline to 27% in fiscal 2024, 22% in the first quarter of fiscal 2025, and 18% by the second quarter of fiscal 2025.

With a new government administration in place, C3.ai anticipates a rise in demand within federal and defense sectors. Founder and CEO Tom Siebel highlighted a shift in interest toward "AI applications, AI applications, AI applications, and then cyber" instead of traditional sectors like submarines and aircraft.

Tom Siebel, who has significant experience in the software industry, previously led his company, Siebel Systems, to a successful acquisition by Oracle Corp in 2006 for $5.8 billion.

As of the current closing price, C3.ai trades at a calendar 2025 enterprise value to revenue multiple of 10.7 times and a calendar 2026 multiple of 8.6 times. The new price target sets a projected 2026 multiple at 10.8 times, which aligns with the median of its peer group due to C3.ai's rapid growth and specialized AI capabilities. Kimson has also forecasted a revenue of $99.0 million for the third quarter with an EPS loss of $(0.26).

Needham emphasized: C3.ai's second-quarter performance exceeded the upper range of its revenue guidelines, coupled with a smaller operating loss than projected due to some costs being deferred to the latter half of fiscal 2025.

Management's key highlight was the partnership with Microsoft announced in late September, which greatly broadens the company’s market potential. C3.ai anticipates an operating loss of $120.0 million for fiscal 2025, which is $10 million wider than previous expectations so that it can support this new initiative. C3.ai plans to invest in customer success, market strategies, and research and development.

The company no longer expects to achieve positive free cash flow for fiscal 2025. The remaining performance obligations (RPO) increased for the first time since the first quarter of fiscal 2024 but still needs to be more substantial during the transition to the pilot program. Additionally, some pilot projects continue to show higher than expected churn rates as the active pilot count stabilizes. Cikos has predicted a third-quarter revenue of $98.1 million with an EPS loss of $(0.25).

JP Morgan noted: Bora revised his AI model to incorporate the second-quarter fiscal results. His price target reflects approximately 7 times enterprise value to calendar 2026 revenue, up from about 5 times the previous year. This is relative to infrastructure software firms that are projected to grow their revenue by more than 20%. Bora added that C3.ai should trade at a discount compared to this group due to its smaller current scale and significantly lower profitability.

Despite expectations of comparable revenue growth rates (approximately 25% for C3.ai versus 24% for peers), C3.ai is approximately 80% smaller than the median company in the group. Furthermore, projected free cash flow margins for C3.ai are expected to be around (10%), resulting in a combined growth plus margin profile of 14%, compared to 23% for the peers. Anticipated operating margins for C3.ai are forecasted at about (30%) in contrast to 15% for competitors.

For the third quarter, Bora has projected revenue of $98.0 million and an EPS loss of $(0.26).

Price Action: Shares of C3.ai experienced a 7.87% increase, pricing at $44.89 during the last update on Tuesday.

C3.ai, Microsoft, partnership