The prevailing trend in the investment sector at the moment is the soaring popularity of AI companies, with one notable exception: C3.ai (NYSE:AI), the enterprise AI PaaS platform spearheaded by Tom Siebel, the billionaire founder of Siebel Systems.
Despite the rapid growth in revenue, expanding client base, and increasing global interest in implementing AI solutions to optimize core business processes, C3.ai has been grappling with an unusually high stock price. Surprisingly, the company did not have an inflated valuation to rectify. Periodically, C3.ai’s stocks have experienced drops exceeding 20%, while competitors like Palantir (PLTR) have witnessed gains exceeding 20%.
Data by YCharts
Amidst unwarranted pessimism, it is imperative to explore the bullish scenario for C3.ai
I initially expressed a bullish outlook on C3.ai back in January when the stock was trading around $27 per share. Despite facing losses since then, I am steadfast in my decision to consistently invest in this stock and potentially increase my position given the recent downturn.
Several new advantages warrant attention. The company has been engaging in increasingly innovative discussions with both private and public clients. Notably, C3.ai’s revenue from federal clients has surged by over 100% year-over-year. In contrast, Palantir, which initially focused on business software services, now derives a quarter of its revenue from government clients, highlighting a significant market opportunity for C3.ai.
Here is a comprehensive overview of my long-term bullish case for C3.ai. For investors new to this stock, here is a summary of my overarching long-term bullish stance:
- The heightened focus on Conceptual AI presents significant growth opportunities for C3.ai over the coming years. C3.ai believes that its total addressable market (TAM) has expanded beyond the market scope in 2022 due to the proliferation of relational AI.
- Diversified clientele base. Over half of C3.ai’s clientele comprises state/local government and national contracts. The recent surge in C3.ai’s bookings has tapped into a market segment traditionally favored by its AI competitor, Palantir.
- Leveraging a consumption-based business model offers substantial growth prospects. Similar to successful growth stories like Snowflake (SNOW) and Twilio (TWLO), C3.ai’s business model allows for scalable expansion over time, particularly with new clients.
- Market expansion. AI is a versatile technology applicable across various industries. While C3.ai initially targeted sectors like heavy manufacturing and oil due to its partnership with Baker Hughes, the company has broadened its scope to include clients in finance, healthcare, and other emerging sectors.
- Strategic partnerships. C3.ai has established strong collaborations with major cloud providers such as Amazon AWS, Google Cloud, and Microsoft Azure, tailoring its offerings for diverse market conditions. The cloud-agnostic approach adopted by C3.ai provides a broader reach across potential users.
- Strong financial position. With a goal to achieve pro forma breakeven by the end of FY24, C3.ai boasts approximately $700 million in unrestricted funds, ensuring financial flexibility and gradual reduction in cash burn.
Maintain a long position: C3.ai is poised for a significant upswing.
Q3 Performance Review
Despite facing challenging market conditions, C3.ai delivered robust financial results in the fiscal third quarter (January quarter) towards the end of February. Key highlights from the earnings report include:
C3.ai Q3 results (C3.ai Q3 earnings deck)
Revenue surged by 18% year-over-year to \(78.4 million, surpassing Wall Street’s projections of \)76.1 million (+14% y/y) and accelerating from the previous quarter’s 17% y/y revenue growth rate.
Notably, as illustrated in the chart above, revenue growth has been on an upward trajectory for five consecutive quarters, reaching the highest growth rate since Q1 of FY23:
C3.ai revenue trends (C3.ai Q3 earnings deck)
A key driver of this growth is the increasing interest in AI solutions. During the quarter, the company secured 50 new contracts (+85% y/y) and initiated 29 new pilot projects (+71% y/y). Additionally, C3.ai inked several significant deals falling within the \(1 million to \)10 million range, as depicted in the chart below:
C3.ai deal bands (C3.ai Q3 earnings deck)
Furthermore, C3.ai, previously heavily reliant on the oil and gas sector due to its collaboration with Baker Hughes, has now diversified its client base across various industries.
C3.ai sector diversification (C3.ai Q3 earnings deck)
As indicated in the data and reiterated by the management, a substantial portion of the company’s Q3 bookings originated from commercial clients. Moreover, C3.ai has significantly expanded its customer base in agriculture and manufacturing compared to the previous year.
CEO Tom Siebel highlighted the robust pipeline of opportunities ahead during the Q3 earnings call:
The enterprise AI sector is witnessing remarkable growth, with widespread adoption across business, defense, and government entities. The demand for AI solutions to enhance operations and drive business transformation is unprecedented.
Our pipeline of qualified opportunities has surged by 73% year-over-year, predominantly led by prospects for C3 Generative AI. Collaborative efforts with our partners have resulted in substantial client acquisitions, with promising early-stage developments.
In the second quarter, we closed 62% more deals through our partner network compared to Q2, marking a 337% increase from the previous year. In essence, the market demand for enterprise AI solutions is overwhelming.
Noteworthy recent developments include a triple-digit year-over-year growth in U.S. government revenue, driven by key contracts with entities like the Department of Defense, the Missile Defense Agency, and the U.S. Air Force.
Valuation and Key Insights
Currently trading around \(22 per share, C3.ai commands a market capitalization of \)2.74 billion. Factoring in the \(723.4 million in cash reserves from its latest balance sheet, the company’s enterprise value stands at \)2.02 billion.
Looking ahead to the fiscal year FY25, Wall Street analysts anticipate C3.ai to generate $367.5 million in revenue, reflecting a robust 19% year-over-year growth. This translates to a modest valuation of only 5.5x EV/FY25 revenue for C3.ai, positioning it favorably compared to Palantir despite following a similar growth trajectory:
Data by YCharts
In my assessment, C3.ai remains an attractive investment opportunity. Acquire shares with confidence at levels close to year-to-date highs.
