Overlooked C3.ai Stock Looks Attractive on the Pullback

As I write this, C3.ai (NYSE:AI) stock has lost a third of its value in 12 trading sessions. But it’s worth noting up front: AI stock still isn’t cheap.

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AI stock still trades at more than 60x the consensus revenue estimate for the current fiscal year (which ends in April). That’s one of the highest multiples in the entire market.

Admittedly, it’s a multiple that could turn off some investors. But I wouldn’t write off AI stock so quickly.

The revenue multiple is high because this is a company that’s at the very beginning of its growth. Indeed, C3.ai in a lot of ways still is a startup, albeit a startup that’s listed on the public market.

And what drives a large portion of startup valuations is the market opportunity. C3.ai — which I’ve been following since it was private — has a massive opportunity in front of it. The recent decline in AI stock shows that investors will have to ride out some volatility, but getting that same opportunity at a cheaper price sounds like a good deal to me.

An Artificial Intelligence Platform

We know artificial intelligence is going to see exponential adoption going forward. We know AI is going to change the world. Indeed, I’ve long argued that it’s one of the “megatrends” that will make this decade the “Roaring 2020s.

The question is who the winners will be. C3.ai has a real shot. The company’s platform, the C3 AI Suite, allows large enterprises to develop their own artificial intelligence applications. C3.ai also can build out applications if needed, and will improve how customers train those models.

It’s a hugely attractive model.

Why C3.ai Can Win

What makes it even more attractive is that C3.ai, as it noted in its registration statement, has a significant “first mover advantage.” Here’s how the company addressed its competitive positioning:

“Our primary competition is largely do-it-yourself, custom-developed, company-specific AI platforms and applications. These tend to be very costly complex software engineering projects, often fail, and, if successful, usually require many years to realize economic return.

We are unaware of any end-to-end Enterprise AI development platforms that are directly competitive with the C3 AI Suite.”

For now, C3.ai has the market to itself. Obviously, that won’t last; rivals will try and engineer their own solutions. And, obviously, that market isn’t very big, given that the company should generate less than $200 million in revenue for all of FY2021.

But the market is going to grow at a rapid clip, particularly once normalcy returns as the novel coronavirus pandemic recedes. And it’s not as if rivals can just flip a switch and instantly compete with C3.ai.

This company was founded in 2009; it has been working on AI for more than a decade. It’s led by founder Tom Siebel, who built Siebel Systems into a business that was sold for nearly $6 billion in 2005.

Nothing in tech, or in life, is guaranteed. But C3.ai has a huge head start in what will be a huge market. Ownership in a company like that is not going to come cheap.

The Case for AI Stock

Admittedly, AI stock can fall a long way before it gets cheap, or close. So soon to its initial public offering, there’s going to be volatility. Lock-up expirations will allow insiders to sell, and traders will look to move ahead of those expirations.

This is not a stock that’s guaranteed to go up immediately. As an early stage company, long-term risks are real as well. Investors need to understand what they’re buying here, and the risks involved in doing so.

But if an investor is willing to take those risks, AI stock has enormous potential rewards. While overall the company is unprofitable, gross margins of 75% in the first half of FY2021 show that this company can become hugely profitable over time. Operating expenses will scale against growing revenue. Customer acquisition costs will come down.

This is a company that has a path to billions of dollars in revenue with healthy operating margins. Yes, it will take years to get down that path. But investors should be looking that far out.

Those who are will like what they see. And I expect that, at some point soon, that rosy long-term view will offset the current short-term worries.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.  


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