For growth investors, artificial intelligence is one sector which is always of interest. After all, AI is at the forefront of many of the technological changes we expect will drive productivity growth over the long-term. For investors in C3.ai (NYSE:AI) stock, that’s a very good thing.
C3.ai’s business model is one based on providing AI solutions for enterprise businesses. The company “runs AI models at scale for powerful predictions across the most complex organizations.”
Sounds good to me.
Finding smarter ways of doing things is what the AI technological revolution is all about. Indeed, C3.ai appears to be one of those companies on the cutting edge. Via machine learning and AI, companies hope to improve their performance and decision making. This will, hopefully, translate into operational efficiencies and profits over the long run.
Investors in AI stock are hopeful they can grab a slice of the value that’s created along the way. And the company’s growth has been decent, to say the least.
Let’s dive more into what C3.ai does, and why investors may want to consider this stock. After all, AI stock is currently trading at a 55% discount to its peak earlier this year.
The Value Proposition Is a Strong One
The value C3.ai brings to the table is notable. In fact, I think this company’s product offering is one which has tremendous potential to create value across a broad clientele. In this sense, I think a significant amount of growth ought to be expected on the horizon with AI stock.
The company’s products are suited toward enterprise businesses without the capabilities of building in-house AI solutions. We’ve seen the value AI solutions have provided across a range of FAANG stocks. In many ways, the AI-related technological breakthroughs we take for granted greatly improve our daily lives.
Whether it’s movie or TV show recommendations from Netflix (NASDAQ:NFLX), a prompt to buy that product we’ve been known to buy on a relatively consistent basis from Amazon (NASDAQ:AMZN), or targeted ads from Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), the value is clear.
However, a wide range of companies don’t have the wherewithal, resources, or capabilities in-house to build AI solutions that could benefit their customer base.
That’s where C3.ai steps in.
C3.ai can assist various enterprise businesses with a range of AI modeling or solutions that would otherwise be impossible for such companies to integrate. These businesses pay C3.ai on a recurring basis. Thus, investors in AI stock ultimately have access to a SaaS business model with excellent long-term cash flow growth potential.
Indeed, that’s an exciting proposition.
Investors Having Problems with Valuation of AI Stock
All this growth comes at a price. Indeed, AI stock isn’t cheap. It’s downright expensive.
Currently, investors in AI stock are paying roughly 36x sales for this company. That’s up there in the nosebleeds in terms of valuation.
With a market capitalization of $6.3 billion on TTM sales of $173 million, this is one expensive stock.
Why?
Well, the company’s growth prospects via its core business model are great. During the company’s most recent earnings presentation, C3.ai noted 19% year-over-year revenue growth, and 23% year-over-year subscription revenue growth.
Now, those are pretty decent growth numbers. However, these maybe aren’t the blow-your-socks-off kinds of numbers investors were looking for. Accordingly, investors seem to be more skeptical about C3.ai’s valuation today than in previous quarters. The recent selloff of AI stock indicates investors want to see more in the way of growth.
However, as fellow InvestorPlace contributor Will Ashworth noted in a recent piece, the company’s growth rate appears to be sustainable. This company is growing primarily via organic means and is not acquiring sky-high revenue growth numbers like other companies might. I have to concede, that’s a valid point.
However, some back-of-the-napkin math on what a 19% annual growth rate would mean for this stock does make the valuation seem a bit silly, even looking out five years.
Plugging $173 million into a CAGR calculator with a 19% growth rate over five years gives us $413 million in 2026. That means if C3.ai continues to grow organically at this 19% rate, investors are still paying 15x 2026 earnings for this company today.
Accordingly, I think this is a stock that will require revenue growth acceleration to make sense. Until that happens, I do think continued downside pressure is likely.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
