C3.ai, Inc. (AI) has been one of the hottest stocks on Zacks.com lately. So, you might want to take a look at some facts that could impact the stock’s performance in the near future.
Shares of the company are up -17.9% over the past month, compared with the Zacks S&P 500 Composite Index’s move of +4.3%. The Zacks Computers – IT Services industry, which includes C3.ai, lost 3% in that period. Now the key question is: where could the stock head in the near future?
Although media reports or rumors about a significant change in a company’s business prospects usually result in a change in its stock price and an immediate price change, there are always certain fundamental factors that ultimately determine a buy-and-hold decision.
Changes in earnings estimates
Rather than focusing on anything else, we at Zacks prioritize evaluating changes to a company’s earnings outlook. This is because we believe the fair value of its shares is determined by the present value of its future earnings stream.
Essentially, we’re seeing the sell-side analysts covering the stock revise their earnings estimates to reflect the impact of recent business trends. And if a company’s earnings estimates rise, the fair value of its shares rises. A higher fair value than the current market price increases investor interest in buying the stock, causing its price to rise. This is why empirical research shows a strong correlation between earnings estimate revision trends and near-term stock price movements.
For the current quarter, C3.ai is expected to report a loss of $0.26 per share, indicating a change of +29.7% from the year-ago quarter. The Zacks Consensus Estimate has moved -2% over the past 30 days.
The current fiscal year’s consensus earnings estimate of -$0.82 indicates a change of +39.3% from the prior year. Over the past 30 days, this estimate has changed by -0.6%.
The consensus estimate for next fiscal year earnings of $0.5 indicates a change of +39.8% from what C3.ai was expected to report a year ago. Over the past month, the estimate has not changed.
With a solid, outside-audited track record, our proprietary stock rating tool, the Zacks Rank, offers a more compelling picture of near-term stock price direction because it effectively harnesses the power of earnings estimate revisions. The size of the recent consensus estimate revision, as well as three other factors related to earnings estimates, has earned C3.ai a Zacks Rank #3 (Hold).
The story continues
The chart below shows the company’s trailing 12-month EPS consensus estimate trend:
earnings per share for 12 months
Consensus 12M EPS Estimate for AI
Projected Revenue Growth
While a company’s earnings growth may be the best indicator of its financial health, not much will happen if it can’t grow its earnings. It is virtually impossible for a company to increase its profits without increasing revenue over a long period of time. Therefore, knowing a company’s earnings growth potential is critical.
For C3.ai, the consensus current quarter sales estimate of $51.46 million indicates a year-over-year change of -26.8%. Estimates of $221.58 million and $240.78 million for the current and next fiscal years indicate changes of -11.5% and +8.7%, respectively.
Latest published results and history of surprises
C3.ai reported revenue of $51.6 million in its most recently reported quarter, representing a year-over-year change of -52.5%. Earnings per share were -$0.33 in the same period, compared to -$0.16 a year ago.
Compared to the Zacks Consensus Estimate of $49.75 million, the reported earnings represent a surprise of +3.72%. The EPS surprise was +13.16%.
Over the last four quarters, C3.ai has surpassed consensus EPS estimates three times. The company topped consensus revenue estimates twice during that period.
Grade
Without taking stock valuation into account, no investment decision can be effective. When forecasting future stock price performance, it is critical to determine whether the stock’s current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects.
Comparing a company’s current valuation ratios, such as price-to-earnings ratio (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly priced, overvalued, or undervalued, while comparing a company to its peers on these metrics gives a good idea of how reasonably priced its stock is.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and non-traditional valuation metrics to grade stocks from A to F (A is better than B; B is better than C, etc.), is quite useful in determining whether a stock is overvalued, properly valued, or temporarily undervalued.
C3.ai has an F grade on this metric, indicating that it trades at a premium to its peers. Click here to see the values of some of the rating metrics that contributed to this rating.
Conclusion
The facts discussed here and other information on Zacks.com can help determine whether the market hype around C3.ai is worth paying attention to. However, the Zacks Rank #3 suggests the company could perform in line with the broader market in the near future.
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This article was originally published on Zacks Investment Research (zacks.com).
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