Returns as of 11/12/2021
Returns as of 11/12/2021
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Shares of iRobot (NASDAQ:IRBT) and C3.ai (NYSE:AI) have taken a beating in 2021, falling 43% and 72%, respectively, off their all-time highs. While the two experienced different causes for these drops, they don’t play major roles in the long-term thesis for either company.
After iRobot was hit with unexpected tariffs this year and C3.ai lost its IPO hype, both stocks have fallen drastically. But those factors might disappear in 2022, meaning that these two companies have a bright future.
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When you think of artificial intelligence (AI) and machine learning, iRobot might not be the first company that comes to mind, but it has the potential to have a strong AI foundation. Plenty of people are likely familiar with iRobot’s vacuums, but the robots are more intricate than meets the eye. The company developed iRobot Genius, which is now integrated into the iRobot app to enable its vacuums to be smarter and more valuable than ever.
Genius tailors the vacuums to fit exactly what consumers want, including their cleaning schedule and preferences while being able to respond and integrate feedback from the consumer to make the cleaning experience the highest quality. The robot also has learned how to detect and avoid cords and pet waste. All of this increased learning and intelligence allows iRobot’s products to be more valuable and effective for its customers.
The stock has been dropping over the latter half of 2021 because the company failed to obtain tariff exclusions this year. This hit the company hard: $42 million in operating expenses were added onto the company’s full-year guidance because of these tariffs, which would have represented $1.24 to $1.27 in earnings per share (EPS) on top of the company’s full-year EPS guidance of $1.15 to $1.74. The company expected to obtain these exclusions at the beginning of this year, so when the odds of obtaining them looked bleak at the beginning of the year, shares began to tumble.
While these tariffs hit the business hard, it still managed to beat third-quarter revenue and earnings estimates. Revenue was $441 million in the third quarter (growing 7% year over year) and net income declined to $57 million from $93 million a year ago. The company did report encouraging news about its Genius platform. It introduced 3.0, which now incorporates AI and machine learning to optimize navigation and remember layouts of specific rooms, all to optimize efficiency, value, and satisfaction.
The company has a valuation of 1.6 times sales and 34 times earnings. While this is expensive, it might be valuable to note that the company’s major earnings hit this year will likely not occur in 2022. If iRobot can obtain tariff exclusions in 2022, it will also get reimbursed for tariffs paid from Oct. 12 until the end of this year. The company expects that it will be able to obtain this exclusion for 2022. This, along with its efforts toward increasing the intelligence of its robots, could push the company forward by a lot going into 2022, leaving the opportunity for a massive bull run.
Shares of C3.ai have been demolished since its IPO in late 2020, but it is far from down and out. After the IPO hype wore off, shares of C3.ai, which offers AI as a service, sunk over 70%.
C3’s AI software uses predictive analytics to further application development and efficiency. The company offers its services to businesses that might not want to produce this technology in-house, or might not be able to. It serves oil and industrial companies, many of which probably won’t attract the best AI developers in the labor market.
The company’s quarter ending July 31 (its 2022 first quarter) had revenue growth of 29% to $52 million and customer growth of 85% to 98 customers. Its gross margin rose from 74% one year ago to 75% in its first quarter, but its sales and marketing expenses jumped more than 155% to $36.8 million. This resulted in a net loss of $37 million, compared to the year-ago quarter’s break-even status.
C3.ai now trades at 22 times sales, which is more reasonable than the 80 multiple from the beginning of this year. The company has immense network effects as a result of obtaining more data from an increasing amount of customers. And that, in turn, makes its AI software more effective for the next customer. This gives me confidence that C3.ai will become increasingly valuable to its customers, propelling its revenue and customer count. Despite its drastic fall this year, C3.ai’s potential is immense, and I think the company has a chance of catching up to its IPO price in 2022.
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Stock Advisor launched in February of 2002. Returns as of 11/12/2021.
Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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