We saw a number of initial public offerings (IPOs) in December. Due to the size of some of these companies, though, some investors may have overlooked C3.ai (NYSE:AI). While AI stock enjoyed a big rally on its IPO, it has since fallen out of favor. For long-term investors, this could finally be an opportunity to get into the stock.
High-growth tech stocks have taken a beating from the 2021 highs. Unfortunately, that’s just part of the game. Growth, technology and speculative stocks often find themselves in “fever mode” as investors plow in. While this can lead to a doubling or tripling in the stock prices, it’s not uncommon to eventually see those names decline by 30% to 50% — or even more.
In the case of AI stock, it falls into the “even more” category, with shares down 67% from the 52-week high of $183.90. But in my view, this high-quality winner is simply caught up in the storm.
Breaking Down AI Stock
I ran into this company years ago when it was still private, anxiously awaiting the day that it would come public. At the time, the company was using artificial intelligence (AI), big data and analytics to help drive efficiencies within the energy space.
C3.ai created value for its customers by saving them money. Would you pay $50 to save $100? Of course. It doesn’t make sense not to. Now, though, the company has spread out to other industries, too. According to its site, the company’s C3 AI Suite helps to “unlock sustained value – hundreds of millions to billions of dollars per year – from reduced costs, increased revenue, and higher margins.” Those savings are delivered in one to two quarters after rolling out.
And while C3.ai is not yet generating a profit, it does generate solid revenue growth. When the company reported its fiscal third-quarter results last month, C3.ai topped revenue expectations, then guided for better-than-expected full-year and Q4 sales.
Despite this, investors sold AI stock lower — although it didn’t help that we were in the midst of a growth-stock meltdown.
For the year, consensus estimates have crept up to $181.54 million in revenue and call for 32% growth in the next fiscal year to roughly $240 million.
While two-year forward estimates are hard to trust from an accuracy standpoint, they can give us an idea of the growth. Currently, analysts expect $323 million in sales for that period. If both years come to fruition — they likely won’t, but for a rough outlook — that would represent an acceleration up to nearly 35% revenue growth.
I love the idea of utilizing artificial intelligence (AI) to improve efficiencies and save companies money. If the product works, customers will not only be willing to stick with C3.ai, they will be willing to pay more.
Bottom Line on C3.ai
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It’s clear that C3.ai has growth. In fact, mid-30% revenue growth is great — it’s just not the type of hyper-growth that some IPO investors want. That doesn’t matter, though. This is a great company, with a strong product offering and dependable growth.
Perhaps the most attractive part of the AI stock story is the secular nature of its business. Put simply, companies will not suddenly decide to be less efficient and save less money. Management won’t decide, “Let’s erode our margins today.”
Unfortunately, though, individual stock picking goes beyond just selecting great businesses. We also have to incorporate valuation. After all, you shouldn’t pay blindly for a stock just because it’s a great company. And while the dotcom bubble gets a bad reputation for having a bunch of revenue-less websites going public, don’t forget that there were some high-quality tech companies that took years to get back to their early 2000 highs. Some never did.
I wouldn’t say AI stock is necessarily cheap, as it still trades at 25 times next year’s revenue. However, it’s a lot cheaper after falling more than 60% from its highs. Shedding two-thirds of its value should get investors taking a closer look at C3.ai.
From here, it’s possible that the stock breaks below the prior Mar. 30 low at $59.75. After that, I don’t know how low this stock could go. Maybe to $50, or even the IPO price of $42 (note that AI stock opened for trading at $100).
But that also means shares are getting closer to “value” than “overvalued.” So, for those interested in the long-term view, you may want to begin accumulating AI stock.
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 this article.
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