C3.ai: The Future Of Enterprise AI – Seeking Alpha

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Vertigo3d/E+ via Getty Images

Vertigo3d/E+ via Getty Images
C3.ai (AI) This offers the public a new take on the future of enterprise software. C3.ai’s unique approach, by being an AI-centric company, automates actions for enterprises to ensure everything from CRM to logistics. The versatility of the company’s products has a wide range of applications that will be central to fueling the growing tech economy. Along with the impressive client portfolio, the company has also done an excellent job growing its small professional services business. Looking at the stock, despite significant price depreciation over the previous 12 months, investors should give a rugged look at C3.ai as the upside of their IP.
The growth prospects for C3.ai are genuine. A wide variety of industries could benefit immensely from C3.ai’s unique technological advantage. Investors have ignored the lead the company had in its space for the past couple of weeks. Now down -80% from its all-time highs, C3.ai may be worth looking at. The rotation into a value will hurt the company and other risks. Overall, I don’t see the value of discounting C3.ai at these levels.

C3.ai revenue trend

AI FY 22 Supplemental Slides

AI FY 22 Supplemental Slides
Revenue has been growing just as fast as the price has been depreciating. Public markets have much less fluff in their valuations than VCs. There was an apparent disconnect between the investment bankers and the public appetite for the stock. Regardless, that allows retail investors to capitalize on Wall Street’s mistake. With overall growth rising and adoption increasing, C3.ai’s suite of enterprise products will remain in high demand from corporations for years to come.

C3.ai revenue mix

AI FY 22 Supplemental Slides

AI FY 22 Supplemental Slides
A subscription-based model has brought incredibly high margin cash flow into a dry cash enterprise for many tech companies. Companies that die by the usage-based plan, such as Snowflake (SNOW) and Twilio (TWLO), give the company a new vertical to pivot to in the future. Currently, Professional services make up the smallest part of their revenue mix, but it’s been increasing. I would increasingly look for more corporations to outsource decoding their data silos to outside corporations so they can focus money elsewhere.

C3.ai Enterprise AI footprint

AI FY 22 Supplemental Slides

AI FY 22 Supplemental Slides
C3.ai has been great at expanding the variety of its partnerships. From finance to oil to biotech, the applications are immense. One of the critical things C3.ai should focus on is developing the professional services business and getting into that very high-margin business. Considering professional services are up 100% QoQ, the growth is there. In the future, professional services could make up much more than just 16% of the revenue mix.
C3.ai has been performing consistently, yet analysts have yet to upgrade the stock. Much of the current analyst concern is around macroeconomic drivers rather than problems within the company. Investors can acquire C3.ai at a bargain-basement price at today’s prices. These shares should return many alphas for years to come.

C3.ai gross margin

AI FY 22 Supplemental Slides

AI FY 22 Supplemental Slides
The gross margins are one of my favorite parts of C3.ai. Having an artificial intelligence-based enterprise software company adds these industries together. The company is creating a very high gross margin niche. Essentially, the company’s expenses are those for administrative and technology costs. There is little outlay for a high return. The subscription gross margin is impressive, and with the fantastic client portfolio, the company is set up well to crush earnings expectations into the future.

C3.ai operating expenses

AI FY 22 Supplemental Slides

AI FY 22 Supplemental Slides
The low operating expenses are very encouraging for an investor to see that the budget is not very high and that the overall operational costs are not hurting earnings. The main concern I see is future competition in the rapidly growing artificial intelligence arena. However, as it stands today, inflation will be much more a problem than C3.ai’s IP getting uprooted.
With any highly speculative tech company, valuations may contract. However, betting on solid technology companies will yield positive results over the long term. As the tech sector expands, so will valuations. Even though there are various macroeconomic concerns, the industry is so new that investors don’t know how to value C3.ai. Therefore, investors are forced to look at the macroeconomic environment to help value the company. Currently, the tech future is looking murky. Rising rates and fed balance sheet tightening hurt high-growth tech stocks. However, I believe the future can be very bright for tech, and I will wait for the sector rotation to end. While I may not want to overexpose my portfolio to C3.ai, I would like to be an investor in the company to make a strong bet on the future of enterprise software. If companies continue to join C3.ai’s ranks like they are, then this is a 100-dollar stock, and investors should remain patient and hold. The -80% correction is overblown, and the main risks have been taken out of the store. Now that the company is severely de-risked, I would own shares. I look forward to seeing what future catalysts potentially affect C3.ai claims.
The valuation needs to be re-rated because the stock has fallen too far. I am comparing C3.ai to Cerence (CRNC), an autonomous software solution for large manufacturers, and Salesforce (CRM), the predominant CRM tool for corporations worldwide. These stocks work within the enterprise software industry and are the closest correlations I could find to C3.ai’s industry combinations. Overall, the undervaluation is stretched, and the shorts will have to capitulate. While this may seem unlikely due to the stock’s poor performance, I believe the increasing adoption of C3.ai’s technology will be a significant driver for institutions to flow into this stock. Moving forward, there is a great risk-reward opportunity in the store, and investors should give C3.ai a severe look.

C3.ai stock price

Seeking Alpha

C3.ai Price Return Seeking Alpha Peer Comparison

Seeking Alpha
C3.ai Price Return Seeking Alpha Peer Comparison
The price return has been nothing less than disappointing. -80% is nothing to brag about. However, the company has been performing operationally. Even though there is a severe tech decline, investors should look at this as a golden opportunity to pick up shares.

AI vs CRNC vs CRM price

Seeking Alpha

C3.ai Price/Sales Seeking Alpha Peer Comparison

Seeking Alpha
C3.ai Price/Sales Seeking Alpha Peer Comparison
The price/sales ratio has been compressed. Going from over 200 to around 11 is a steep decline in price/sales. Even though the 11x price/sales ratio is still high, it is much better than what it has been historically. Furthermore, Salesforce and Cerence have similar price/sales ratios despite sector rotation. This shows the stability of extensive CRMs and rapid sales growth of C3.ai.
There are ample opportunities on the horizon for C3.ai. The company’s portfolio of products is in high demand for various enterprises. Operations are vital, and sales have been robust. Overall, C3.ai is a solid stock to own in 2022, even in the face of macroeconomic and sector uncertainty. I rate C3.ai as a buy and look forward to future earnings results from the company.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of AI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Connect with Chris Hood, a digital strategist that can help you with AI.

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