On Thursday, Morgan Stanley (NYSE:MS) adjusted its outlook on shares of C3.ai (NYSE:AI), increasing the price target to $21 from the previous $20 while maintaining an Underweight rating on the stock. The firm noted C3.ai's revenue performance exceeded expectations in the third quarter, with an 18% year-over-year growth. Subscription revenue, particularly from government contracts, was highlighted as a key growth driver.
The company's recent financial results showed a significant contribution from government sectors, with state and local government bookings making up 29% and federal revenue and bookings rising by 100% and 85% year-over-year, respectively. Despite concerns over the sustainability of this growth level, management anticipates continued opportunities in both federal and state sectors.
C3.ai reported closing 50 agreements, including 29 pilots, in the third quarter, a slight decrease from the second quarter's 62 agreements and 36 pilots. The qualified opportunity pipeline grew by 73% year-over-year, aligning closely with the 75% growth seen in the previous quarter.
The company's investment in lead generation is expected to persist, following the return on investment seen in the third quarter, although this strategy is projected to result in fourth-quarter operating income falling short of consensus estimates. Nonetheless, C3.ai forecasts positive free cash flow in the fourth quarter.
Morgan Stanley acknowledged the company's successful transition towards consumption, which has led to four consecutive quarters of accelerating growth. However, the firm expressed caution regarding the stock's valuation, citing a price-to-sales ratio that remains high compared to peers, given the business's growth forecast of less than 20%. The firm remains open to adopting a more constructive stance if C3.ai's growth profile and underlying profitability improve.
InvestingPro Insights
As C3.ai (NYSE:AI) continues to navigate the competitive landscape of artificial intelligence solutions, recent data from InvestingPro provides a clearer picture of the company's financial health and market performance. With a market capitalization of $3.56 billion and a notable revenue growth of 11.14% over the last twelve months as of Q3 2024, C3.ai demonstrates resilience in expanding its financial base. The company's gross profit margin stands strong at 58.86%, underscoring its ability to maintain profitability on its core offerings.
InvestingPro Tips highlight that C3.ai holds more cash than debt on its balance sheet, indicating a stable financial position that may reassure investors of the company's ability to manage its finances effectively. Additionally, the company's liquid assets exceed its short-term obligations, providing further evidence of financial stability. However, it is important to note that analysts have revised their earnings downwards for the upcoming period, suggesting that investors should keep an eye on potential shifts in the company's performance outlook.
Despite challenges, C3.ai has experienced a significant return over the last week, with an 11.49% price total return. This could signal growing investor confidence or a response to recent company developments. As the next earnings date approaches on May 30, 2024, market watchers will be keenly observing whether these trends continue. For those seeking more in-depth analysis, InvestingPro offers additional insights, with a total of 9 InvestingPro Tips available at https://www.investing.com/pro/AI. To access these insights, interested readers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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