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C3.ai (NYSE:AI) is a digital services company that provides AI-integrated enterprise software to companies worldwide. The company has more than 200 customers across multiple industries that utilize C3.ai’s software to streamline efficiencies and help guide them into a new age of digital transformation. However, despite the secular tailwinds behind the artificial intelligence industry, C3.ai’s stock has not performed as well as the underlying company.
The central thesis with this stock is the first-mover advantage in what could turn out to be a massive addressable market that the company values at $365 billion today and more than $590 billion by 2025. C3.ai provides AI enterprise solutions to companies on a subscription-based model. By revenue, subscriptions make up roughly 82% of the business.
They provide more than 40 Enterprise applications for their clients, which is one of the differentiating factors for the company as they already offer solutions to firms in the banking, utilities, government, and chemical manufacturing industries, just to name a few. They support these industries by assisting with everything from inventory optimization to demand forecasting. Outside of the AI Enterprise Solutions, the company also provides a software platform, the C3.ai suite. The C3.ai suite allows clients to manufacture and operate their own AI applications, which is quite common. But the thing that makes this software unique is that it eliminates the reliance on one vendor. Put another way; customers can build and operate their own internal solutions on the C3.ai platform and run those solutions on AWS and Google Cloud, for example, without modifying the applications to suit the vendors. This enables flexibility which is an excellent value-add for medium to large firms.
After its December 2020 IPO, the stock soared to an all-time high price of $183 per share. The stock has since slumped spectacularly leading some to suggest that it’s a bargain at current levels.
Much of its initial ascent was attributable to a frothy market that pushed growth stocks to elevated levels. Now the stock trades at $17 per share and has a reasonable price to sales ratio of 7.14 which has put it on the radars of many would-be dip buyers, especially with the recent earnings release.
At the beginning of March, C3.ai posted an impressive earnings beat that clued investors in on just how fast the company is growing. Revenues came in at $69.8 million, a 42% year-over-year increase.
Perhaps more importantly, gross margins jumped to an impressive 80% last quarter, and losses narrowed as the company took another step towards profitability.
Customer count was up 82% year-over-year to 218, which is essential because of how the company does business. C3.ai is a SAAS business, and these companies grow in two main ways, namely new customer growth and increased penetration of the existing customer base. The company attributes a significant portion of the recent revenue success to a combination of these two methods.
Typically SAAS customers sign on for a very specific need, and then if outcomes are favorable, there is a sort of customer-driven growth across use cases which is, of course, profitable for the provider. This closely mirrors the guidance put forward by the leadership team on the firm’s growth strategy going forward. For this reason, I would encourage investors to pay attention to customer count going forward as new customers often purchase down the line with these companies if they execute well. I would expect C3.ai to continue to penetrate its existing client well but there are signs of saturation in the space. AI solutions seem to be proliferating faster than the market can develop but for the time being C3.ai’s offerings seem sufficiently differentiated to relax investors’ fears.
C3.ai has some big-named, global customers, including oil giants like Baker Hughes and Royal Dutch Shell and Bank of America and Phillips. One thing to note is that Baker Hughes is the largest client for C3.ai, and it accounted for nearly 40% of revenue for the first three quarters of the fiscal year 2022. As a result, customer concentration might be a problem for C3.ai, although it does have a contract with Baker Hughes until 2025.
Like another enterprise software giant in Palantir, C3.ai has turned to government contracts to beef up its revenues. The company recently signed a $500 million five-year agreement with the US Federal government, including working with sectors like the Air Force and Space Command. However, leadership is not planning on focusing on federal contracting; instead, expecting it to be 15% of their business in the long run.
The company is in good financial shape from a liquidity standpoint. They still have more than $1 billion cash from the IPO and even approved a $100 million share buyback plan that shareholders love to see. C3.ai is growing steadily, and both its gross margins and net losses are heading in the right direction. C3.ai is trading at a much more reasonable valuation today than it was at any point last year. The recent negative sentiment around growth stocks will hurt the stock over the short to medium term, and the stock could reasonably fall another 50% from current levels. The stock is an excellent option for long-term exposure to the AI industry, but it is losing an awful lot of money. I would expect losses this year to come in anywhere from $90 to $130m, which would be a definite improvement. This would be a speculative buy in normal conditions, but I would encourage shareholders to wait until the overall market conditions improve. The company has excellent leadership, but they need time. I don’t see any significant reason to rush to buy, but there aren’t many great reasons to sell either. I rate the stock a Hold.
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