Like most tech stocks, C3.ai (NYSE:AI) shares have been sold off during this last market correction. However, despite dropping more than 50% from its all-time highs, AI stock is still up compared to its initial public offering (IPO) price. After such a massive selloff, should investors be worried that shares could fall further?
The answer is simply no, as nothing has changed about the company’s long-term outlook. I can’t predict if AI stock will recover in the next few months or continue its downtrend. However, I believe that C3.ai’s potential is so great, even investors who bought near the highs should consider dollar-cost averaging at these prices.
The Field of Artificial Intelligence Is a Massive Opportunity
C3.ai is a leading artificial intelligence (AI) software provider for enterprise businesses. The company offers a whole suite of services to help businesses accelerate their business transformation. It’s no secret that AI has the potential to change the way businesses operate. Moreover, this isn’t some pipedream that will happen in the far future; AI is here and available now.
According to a 2019 survey, 85% of business leaders think that AI will have a significant impact on their business in the next five years. AI will unlock more processing power, allowing organizations to analyze the huge amounts of data they receive. And it can vastly improve a business’s performance by increasing efficiency and finding unique insight buried within the data.
Most of the leading technology firms already use AI to a certain degree. For example, Facebook (NASDAQ:FB) uses AI to analyze millions of pictures and posts to remove offensive content. I believe most companies can apply the principles of AI to their own businesses. However, not all companies have the same capabilities as Facebook or other large tech firms to create and deploy their own AI systems. This is where C3.ai comes in.
C3.ai provides comprehensive services to build enterprise-scale AI applications. By going to C3.ai, firms can get the best AI solutions easily and cost-effectively. The company’s solution is easy to deploy and scalable. These solutions range from low-code analytics tools to pre-built applications for common use cases such as fraud detection.
According to Acumen Research, the global artificial intelligence market is expected to grow at a compound annual growth rate (CAGR) of around 49% and to reach $160 billion by 2026. Impressively, C3.ai already counts as its customers a handful of very quality companies from a variety of industries. Some of these are Bank of America (NYSE:BAC), Shell (NYSE:RDS-A), Raytheon (NYSE:RTX) and the U.S. Army.
AI Stock Can be Considered a Recover Play
C3.ai has had a challenging 2020. Although the company beat revenue expectations, the growth rate was disappointing for investors. In the latest quarterly results, C3.ai’s revenue was $49.1 million, up 19% compared to $41.3 million at the same time last year. A hyper-growth company like C3.ai should be growing revenues by 30% to 40% year-over-year to justify its market capitalization.
This disappointment is the main cause of AI stock’s massive decline. I believe, though, that such a large selloff in the stock is unwarranted. It is clear that the pandemic was a major contributing factor to the lack of growth. During the height of the pandemic, the uncertainty forced companies to cut budgets and scale down new initiatives in order to conserve cash. C3.ai’s tepid results are not unusual when compared to other firms serving enterprise clients.
Investor Takeaway
The long-term bullish case for the company remains intact. I believe the company is still poised for many quarters of future growth. There is a good chance for the stock to rebound in 2021 or 2022 as things return to normal. Bears may argue that the valuation of C3.ai is still a little expensive. The company currently trades at around 35x price-to-sales.
However, the company currently only has a small customer base of about 30 customers. With a handful of big enterprise “wins”, this valuation can quickly improve. According to Wedbush Securities,
“We believe C3 has the ability to further penetrate enterprises and governments across the board over the coming years. In the current SaaS market, there has not been a competitor to deliver such a product, yielding minimal competition, taking a step forward and on top of other players in the industry.”
C3.ai is a pioneer and leader in the industry. For investors that believe in the long-term potential of AI, I believe C3.ai is a good stock to own.
On the date of publication, Joseph Nograles held a LONG position in AI and FB.
