C3.ai (NYSE:AI) stock has been arguably one of the worst-performing newly-public tech plays on the market, falling from its $177 December 2020 highs to today’s price around $32.50.
Artificial intelligence is expected to witness healthy growth in the next few years and decades. C3’s wide enterprise AI software suite could see the company find massive tailwinds for growth in the long run.
C3.ai offers a wide range of applications for its enterprise clients to accelerate AI transformations. The company offers several cross-industry and industry-leading applications which provide robust data analysis, risk management and optimization.
The Basics of AI Stock
In the past three years, the company’s sales growth has been at an average of 44%. Its gross margins have been at an unimpressive 75.5%, while net margins were a negative 34%.
On a more positive front, its balance sheet is relatively pristine with net debt of $8 million this year. All in all, the company has done well to build its customer relationships in several end markets and set the stage for a highly-encouraging future.
C3.ai is still in its formative growth stages, having $183.2 million in fiscal 2021 sales and fluctuating growth rates. However, that’s common in an enterprise model with longer customer acquisition times and higher costs with recurring revenue in the long run.
The company is experiencing strong growth in customer count, with an increase of more than 63% on a year-over-year (YOY) basis in its most recent quarter. Nevertheless, revenue growth remains bumpy.
In the long run, AI adoption will provide a lasting tailwind for the company and growth in applications and clients. Though the company has bumpy growth rates, they are expected to normalize in the long run as the business scales up.
Over the past five years, the firm has witnessed revenue growth of about 49%. It is likely for growth to normalize around an annual rate of 26% over the next seven years. With such growth rates, revenues will eclipse $1.5 billion by fiscal 2030.
The Massive Growth in AI
AI presents a massive opportunity for companies to create more value for their customers. Adoption is still in its early stages and has a healthy outlook ahead.
The AI market is expected to rise above $340 billion this year, growing at a healthy 18.8% from 2022 to more than $500 billion by 2024. Additionally, software platforms take the cake for the highest growth rate in their subsegments at a five-year growth rate of more than 33%.
C3.ai expects its total addressable market to grow from $174 billion last year to $274 billion by 2024. However, the primary challenge for the company remains its ability to impact at scale.
It also involves how efficiently AI operations can meaningfully drive top and bottom-line growth in several different use cases. In this regard, AI and C3.ai have a long way to go.
Effectively tailoring its offerings from a wide variety of customers across various industries can enable C3.ai to gain a much larger market share. Assuming it could operate at scale and achieve margins of close to 80% to 85%, the company will be setting itself up for an incredible trajectory for share price returns.
Bottom Line on AI Stock
AI stock’s performance has been highly disappointing for its investors of late. However, it appears the market is overreacting to the bumpiness in the company’s revenue patterns.
C3.ai has an exciting growth runway ahead — one where it could become a big player in the burgeoning AI sector. Even if the company can grab a fraction of its huge total available market, it could be looking at massive revenue streams ahead. Though it has been a bit sluggish, investors should stick with AI stock for the long haul at this time.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
