C3.ai Inc. (NYSE: AI) stock shrugged off an initial round of selling and was up about 3% in mid-day trading on heavy volume. This came the day after the company reported earnings for the second quarter of its 2025 fiscal year. C3.ai stock had dropped about 10% in the premarket as investors reacted to the company’s quarterly report.
The report's headline numbers beat expectations. The company generated $94 million in revenue, which was above expectations of $91 million. That was a 29% year-over-year (YoY) increase in revenue growth and a 22% YoY increase in subscription revenue growth. This was the seventh consecutive quarter of increasing revenue growth. The company also raised its revenue target for the coming quarter and the full fiscal year.
On the earnings front, C3.ai reported a narrower-than-expected earnings per share (EPS) loss of six cents. Analysts had been forecasting a loss of 14 cents per share. However, the issue troubling many investors is the company’s path to profitability. As we head into 2025, investors seem willing to accept that valuations are extended. Outside of some black swan event, that’s not likely to change.
But it’s one thing for technology stocks to trade at a premium valuation when companies are delivering growing, profitable earnings. That’s not the case with C3.ai, and with the path to profitability pushed back by at least 12 months, it’s fair to ask if this is the right place to put your capital.
A Plug and Play Solution With a Large Addressable Audience
Many companies know they need to have an AI presence. It’s becoming like what the internet was in the late 1990s and early 2000s. However, many of these same companies lack the resources to build their own large language models (LLMs) that are needed to train an AI system.
That’s where C3.ai comes in. It gives companies turnkey customizable AI applications for enterprise-level customers. This approach allows the company to serve a unique niche in the AI market.
Demand is strong based on the 58 new agreements the company added in the quarter. However, much of that growth may have already been baked into the stock price, which has surged by over 78% since the company reported an expanded partnership with Microsoft Corporation (NASDAQ: MSFT) on September 30. Under the terms of this partnership, C3.ai is a preferred application provider on Microsoft’s Azure platform. The company will also create a joint go-to-market engine fueled by Azure sales channels.
Biggest Opportunity or Biggest Risk?
Currently, C3.ai generates a significant amount of its revenue from government contracts. That’s not surprising. The wars of the future will increasingly be won by software and drones.
However, Federal, Defense & Aerospace contracts make up about 33% of the company’s business. That’s down from the 49% it was in the same quarter in 2023, but it still means that C3.ai is heavily dependent on cyclical business and likely to be under scrutiny from the incoming Trump administration.
Government contracts are more expensive to obtain and generally have a long sales cycle, which can negatively impact profitability. Therefore, the company must continue diversifying away from the government sector, but doing so may reduce margins.
Short Interest Makes C3.ai Stock a Better Trade Than Investment
If you’re not currently involved in C3.ai stock, be advised trading could be volatile. The post-earnings price action in AI stock points to a short squeeze. Short interest in the stock is currently over 17% of the float. That means the stock may have higher to run in the short term. It also means that the stock price could reverse just as suddenly as it’s gone up.
Since the report, the analyst forecasts tracked by MarketBeat show largely bullish sentiment. JMP Securities was the most bullish, maintaining its Outperform rating for the stock while raising its price target from $40 to $55. However, the current consensus price target is still at $33.10, which would be a downside of over 23%.
But it’s important to note that many of the company’s current agreements are pilot programs. It will take several quarters before investors know how many of these contracts will lead to sustainable revenue and push the company closer to profitable earnings. That’s where sustainable stock price appreciation will come from.
