On Wednesday, Canaccord Genuity (TSX:CF) updated its outlook on C3.ai (NYSE:AI) shares, a leading enterprise AI software provider, by increasing the price target to $40 from the previous $23 while maintaining a Hold rating on the stock.
The firm acknowledged the company's impressive streak of seven consecutive quarters of accelerating growth, which is reflected in the company's robust 21.73% year-over-year revenue growth. According to InvestingPro data, the stock has shown significant momentum, delivering a 33.28% return over the past six months.
The analyst from Canaccord Genuity noted that C3.ai's deal activity and pilot creations in large enterprises continue to be robust. This is reflected in the raised revenue guidance for fiscal year 2025, which anticipates approximately 25% year-over-year growth, placing it in the upper quartile for growth within the software sector.
However, the same optimism was not extended towards profitability, as the lowered FY25 profit guidance suggests margins around negative 31% at the midpoint. InvestingPro analysis reveals that analysts don't expect profitability this year, with 12 analysts recently revising their earnings estimates downward.
Despite the growth, Canaccord Genuity pointed out that the revised guidance might not be enough to change the perspective of bearish investors who are concerned about the core profitability of the business. The firm indicated that concrete evidence to alleviate these concerns may not emerge until at least fiscal year 2026.
The report also highlighted C3.ai's healthy financial position, with approximately $730 million in net cash on the balance sheet. The analyst expressed that while the company's market opportunity necessitates a departure from frugality in the short term, profitability remains an essential factor in valuation.
The new price target of $40 reflects approximately 10 times the expected sales for calendar year 2026, up from the previous valuation of around 5 times. This adjustment is partly attributed to C3.ai's new partnership with Microsoft (NASDAQ:MSFT), which has made the company's shares more attractive based on mid-20's growth prospects.
With a current market capitalization of $5.29 billion, InvestingPro analysis indicates the stock is trading above its Fair Value, suggesting investors should carefully consider their entry points. Canaccord Genuity's revised price target is a recognition of the company's growth potential, despite the ongoing concerns about profitability.
In other recent news, C3.ai has been the subject of several analyst ratings and strategic partnerships. JPMorgan (NYSE:JPM) downgraded C3.ai from Neutral to Underweight, setting a price target of $28, citing concerns over the company's uneven performance. The firm also pointed out the company's high costs associated with revenue growth, and a potential risk with the company's key relationship with Baker Hughes (NASDAQ:BKR) expiring in April 2025.
In contrast, C3.ai has entered into a partnership with IT systems integrator ECS to enhance the U.S. Army's intelligence processes. This partnership involves deploying C3 AI Decision Advantage, an AI-enabled application suite, to streamline the Army's information collection management workflows.
C3.ai's third-quarter earnings exceeded expectations, with revenue reaching $94.3 million, an 8.2% increase quarter-over-quarter. This growth was attributed to the company's performance in both federal and commercial sectors, as well as potential benefits from its expanded collaboration with Microsoft.
Despite these developments, analysts from Piper Sandler, DA Davidson, and Needham have maintained a Neutral or Hold rating on the company's shares. They cited challenges in profitability, higher-than-expected churn rates in C3.ai's pilot programs, and projected continued losses this fiscal year as reasons for their ratings. These recent developments highlight the ongoing challenges and opportunities that C3.ai faces in the AI market.
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