Editor’s Note: This article was updated to note that Koch Industries is now the largest privately held company in America.
C3.ai (NYSE:AI) is a leading artificial intelligence company. Specifically, it makes software for companies to optimize and streamline their operations using machine learning. The company has customers in oil & gas, banking, manufacturing, and the U.S. military, among others. AI stock was a blazing hot initial public offering (IPO) months ago, but has now fallen 60% from its recent highs.
Even now, some critics say AI stock looks overvalued. If you just look at the static numbers, it seems expensive. After all, it’s at nearly 40x sales and only grew revenues 19% last quarter. That’s a disaster, right? However, there’s more to C3.ai than that.
AI’s Revenues: What The Market Is Missing
AI is not like a traditional SaaS company. It doesn’t sell a ton of product licenses to a bunch of small and mid-sized businesses. A standard SaaS sells an affordably-priced service to thousands of clients. Thus, revenue growth is fairly predictable and linear since the company can sign up many customers every quarter. That’s typical for SaaS, anyway.
C3.ai, however is not like this. It only had a couple dozen customers total at IPO. But, unlike most SaaS companies, C3.ai sells huge contracts.
For example, C3.ai’s cornerstone contract is with energy services firm Baker Hughes (NYSE:BKR). This contract, incredibly enough, mandates that Baker Hughes by $450 million of services from C3.ai over a five year period. C3 had received $47 million of this Baker Hughes money at the time of the IPO, with the other $403 million pending in future years. It scales up over time; Baker Hughes will buy $150 million of services from C3.ai in just one year (2024).
For the sake of context, C3.ai generated $172 million from all its customers over the past 12 months. In 2024, it will be earning essentially all of its current revenue base from just one customer. That should show why it’s silly to assume C3.ai’s current slow revenue growth rate will remain depressed for long.
Baker Hughes Sets A Precedent
Why did Baker Hughes sign such a gigantic contract with C3.ai? Because the software has tremendous capabilities far beyond its rivals, for one thing. But also because Baker Hughes wanted control over this technology. It gets privileged access to the software within energy services, and then can choose to resell service onto other peers in the space.
Energy services, of course, is just one industry. What happens to C3.ai’s overall business as it signs up flagship customers — Baker-Hughes style — in dozens of other industries in coming years? You don’t need too many $150 million a year customers before you’re doing serious business.
And, even given C3.ai’s relatively small size, it is earning some of the highest gross margins in its space, close to 80%. That’s well north of rivals like Palantir (NYSE:PLTR) As revenue scales, C3.ai should become profitable a lot more quickly than people expect.
Returning To Faster Growth
C3.ai was growing at 70%/year prior to the pandemic. While I’m not sure it will ever get back to quite that old rate, the current level is an artifact of Covid, not any statement of its long-term potential. You have big contracts with the likes of Baker Hughes that scale up naturally, ensuring revenue growth. And then sign one or two more big customers every quarter and things will be cooking again.
Additionally, C3.ai just launched a lighter retail version of its product. Now, the general public can use a version of the platform for $300/month. This could add significant incremental revenue given that the business has relied almost solely on large contracts with Fortune 100-type companies up until now.
A Legendary CEO
Much of C3’s appeal is due to its CEO, Tom Siebel. Siebel famously urged his then-employer, Oracle (NASDAQ:ORCL), to create a customer-relations management software tool back in the early 1990s. Oracle turned him down. So Siebel quit and founded his own, in the process creating the first significant CRM company. Salesforce (NYSE:CRM), by contrast, would not be founded until 1999.
Siebel built his Siebel Systems CRM to $2 billion in annual revenues with thousands of employees in dozens of countries by the mid-2000s. In an ironic turn, Oracle ended up acquiring Siebel at a huge premium.
As entrepreneurs like to do, Siebel founded another company, C3.ai in the late 2000s. It initially focused on using artificial intelligence for energy management and has branched out from there. Using that huge contract with Baker Hughes along with high-profile customers such as the U.S. Air Force, C3.ai went public last fall, and now we’ll see if Siebel can pull off his next 10-bagger.
I’m not the only person who finds the stock attractive at lower prices. Looking back to the IPO, big backers came in. Microsoft (NASDAQ:MSFT) bought $50 million of AI stock at the IPO price of $42, for example.
In addition, Koch Industries, the largest privately-held company in America, bought $100 million of AI stock at the same price. Koch generates $115 billion a year in revenues and is a leading backer of conservative and libertarian political causes.
Given Koch’s unmatched political connections, it’s most intriguing that it invested in C3.ai, which already has an important contract with the Air Force. When you have that sort of political power, you know which parts of the military-industrial complex are set for rapid growth.
AI Stock Verdict
If you want an exact price target for C3.ai, you’re going to be disappointed here. There’s too much uncertainty here for that. However, I will say people were paying up to $165 a share for AI just two months ago. Now it’s at $70.
This is what capitulation looks like in a hyper-growth stock. Could it keep dropping? Of course. If the moonshot growth stocks keep sinking, AI would go with them.
However, these stocks are absurdly oversold on a technical basis and should have a quick 30-50% bounce in them whenever sector sentiment improves.
Going forward, there’s more than just being oversold to justify a speculative position here. There’s also the matter that the company’s revenue growth rate is artificially low at the moment due to Covid. Assume a couple of new big contracts and/or their retail data service product taking off. Analysts will start penciling in 40-50% growth again annually instead of 19% and AI stock will be back to the triple digits.
On the date of publication, Ian Bezek held a bullish position in AI stock via Dec. 2021 $80 call options. He also owned AI stock directly.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.