C3.ai (NYSE:AI) stock has been quite a disappointment for many investors.
AI stock has absolutely plummeted, losing nearly 75% of its value from its highs. However, any investor truly focused on the long-term does not look at stock performance alone.
In this article, I am examining whether or not the investment thesis for the company has fundamentally changed.
Short-Term Results Disappoint
C3.ai’s latest earnings release was considered to be a disappointment by Wall Street analysts. To be honest, it’s hard not to be disappointed with the company’s earnings results. Total revenue for the company’s fiscal first quarter 2022 was $52.4 million. This is a relatively small base to grow from making it easier to blow earnings out of the water. The company grew revenue by 29% in the quarter. Subscription revenue was the bulk of the revenue at $46.1 million.
Like most investors, I consider these rates of growth to be somewhat disappointing. AI stock would need hockey stick-type growth rates in order to justify its current market cap. For context, AI stock is trading at a market cap of $4.5 billion. It’s incredibly expensive at these levels. In my original thesis, I said that given that most of the company’s customers are enterprise-level firms it will only take a handful of customers to see growth rates rise astronomically.
This obviously hasn’t happened yet and what we are seeing from C3 AI has been mostly slow steady incremental growth. Given the current market sentiment, Wall Street doesn’t have a lot of patience to wait for growth.
Wedbush analyst Dan Ives considers “the company’s results as positive overall with some “soft spots.” Investors, however, were hoping for a much more considerable beat because of a choppy quarter after its public listing in mid-December.” Wedbush cut the company’s price target from $100 to $70.
According to TipRanks data, AI stock has a 12-month average price target of $75. The range of this forecast is a high of $122 and a low of $45. This implies that there is a “margin of safety” in purchasing AI stock even at these price levels.
The California-based software provider is making headway in developing partnerships and expanding its product offering. These developments make me confident in continuing to recommend AI stock despite its massive decline. There were two major developments in this quarter that I feel could be game changers in the future.
The first is the partnership between Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and C3.ai to accelerate the development of enterprise-level artificial intelligence solutions. Under the agreement, both companies will co-sell AI applications running on Google Cloud. While not the dominant cloud provider in the industry, Google Cloud still has a robust client base that could benefit from C3.ai’s offerings.
C3.ai is also planning to develop solutions that specifically leverage Google Cloud’s unique capabilities. Popular Google Cloud products that could leverage machine learning models include Kubernetes Engine and BigQuery. Industries that could benefit immensely from this type of solution include manufacturing, logistics, financial services, and many others.
The other major development for the company in its expansion into customer relationship management (CRM) software. Every enterprise relies on a CRM in order to manage its operations. CRMs keep track of critical customer information making them a potential gold mine for data analysis.
Historically, C3 AI has been heavily reliant on customers from the oil and gas industry. By expanding into CRM, C3.ai greatly expands the number of companies it can target in the short term. Popular CRMs include Microsoft Dynamics (NASDAQ:MSFT), Salesforce (NYSE:CRM) and SAP (NYSE:SAP). Enterprise users of these systems are potential targets for this initiative. This represents a potential $500 billion market opportunity for C3.ai.
The Bottom Line for AI Stock
I still believe in C3.ai’s long-term potential despite the massive drop in AI stock. Artificial intelligence is such a new industry that adoption may not be immediate. Therefore, the company’s revenues may continue to disappoint in the short term. However, I believe C3.ai is laying the foundations for long-term growth.
On the date of publication, Joseph Nograles held a long position in AI, MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.