C3.aiit is (AI -19.33%) the stock price fell nearly 16% during after-hours trading on Aug. 31 after the company’s first-quarter earnings report was released. Enterprise AI software company‘s revenue rose 25% year-over-year to $65.3 million, beating analysts’ estimates by 0.7 million bucks.

On a GAAP (Generally Accepted Accounting Principles) basis, its net loss went from $37.5 million to $71.9 million. But on a non-GAAP basis, it cut its net loss from $22.7 million to $13.2 million, or $0.12 per share, wiping out consensus forecasts of a net loss. of $0.24.

However, C3.ai expects its revenue to increase only 3-6% year-over-year in the second quarter and 1-7% for the full year. . That was well below its earlier revenue growth forecast of 22-25% for the full year.

Does this grim stance signal it’s time to ditch C3.ai, which is now trading more than 60% below its IPO price of $42? Or can this struggling company stabilize its business and make a comeback in the next few quarters?

Why is C3.ai’s growth stagnant?

C3.ai develops AI algorithms that can be used to optimize an organization’s operations, reduce costs, improve employee safety and detect fraud. These tools can either be integrated into a customer’s existing software infrastructure or be accessed as standalone services. It primarily serves large energy, industrial and government customers, and its largest customer by far is the energy giant hugue baker (BKR -2.61%)with whom it operates a joint venture.

C3’s revenue soared 71% in fiscal year 2020, which ended in calendar April, but grew only 17% in fiscal year 2021 as the pandemic abated. disrupted the energy and industrial sectors. Its revenue grew 38% to $253 million in fiscal 2022 as those headwinds passed, but its year-over-year growth in remaining performance obligations (RPO , or the future revenue it expects to generate from its existing contracts) and total revenue have further cooled significantly in the last three quarters:

Data source: C3.ai. YOY = year after year. RPO = remaining performance obligations. GAAP = generally accepted accounting principles.

The company’s bleak outlook for the rest of the year indicates that those double-digit percentage growth rates will soon cool to single digits. He attributed the slowdown primarily to macroeconomic headwinds rather than competitive challenges.

During the conference call, CEO Tom Siebel said his customers “appeared to be expecting a recession” and that their orders were “consistent with that expectation.” Siebel also warned that the next “market downturn could be significant.”

Change its underlying business model

Nonetheless, Siebel still expects revenue growth to “return to historical annual growth rates” of more than 30% in fiscal 2024 and beyond. To do this, it radically changes its original business model. At the time of its IPO in 2020, the company generated the bulk of its revenue from large customers and recurring subscriptions.

But over the past year, C3.ai has sought smaller, lower-value customers to diversify its business away from Baker Hughes and its other large business and government customers. As a result, his average total contract value (TCV) decreased 52% sequentially to $1.4 million in the first quarter.

It also plans to move from its subscription-based model to a consumption-based model, which would free its customers from recurring subscriptions and only charge them based on their usage rates. This flexible pricing model, which is also used by other cloud software companies like Snowflake and Twilio (TWLO -2.77%)could be more widely accepted in this difficult macroeconomic environment.

Yet both of these strategies are risky. C3.ai needs to win a lot of small customers to reduce its dependence on large corporations and government contracts, and eliminating its persistent subscriptions could lead to lower and higher revenue.

Focus on narrower losses

While C3.ai shifts gears, its gross margins remain stable at around 80%. It is also reducing its non-GAAP operating losses.

Data source: C3.ai. Non-GAAP basis.

For the full year, it expects to post a negative non-GAAP operating margin of approximately 36%, compared to its negative operating margin of 44% in fiscal 2022. That may only seem like a slight improvement, but Siebel says C3.ai can achieve “non-GAAP positive profitability and cash flow from normal business operations” by fiscal year 2024.

The stock is still not a bargain yet

C3.ai may recover over the next few years, but its sharp reduction in full-year guidance suggests investors should be deeply skeptical of its bullish expectations for fiscal 2024.

Nor is its stock cheap at six times this year’s sales. Twilio, the aforementioned cloud-based communications company, which continues to grow much faster than C3.ai, is trading at just three times this year’s sales. C3.ai could easily be halved in this tough market, so investors should avoid it for now and stick to more stable cloud software stocks instead.

Leo Sun has positions at C3.ai, Inc. The Motley Fool has positions and recommends Snowflake Inc. and Twilio. The Motley Fool recommends C3.ai, Inc. The Motley Fool has a disclosure policy.