Wall Street Has it Wrong About C3.ai

  • C3.ai recently had its target price cut to $20 by Morgan Stanley
  • Companies utilizing artificial intelligence (AI) aren’t getting love from Wall Street
  • Forget what the pros say and buy AI stock anyway
Cars in a parking lot against a gray cloudy sky with a billboard for C3.ai with company logo

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Wall Street hasn’t been kind to C3.ai (NYSE:AI) in March. In the latest price cut by Wall Street, Morgan Stanley (NYSE:MS) analyst Sanjit Singh cut its target price from $31 to $20, maintaining the firm’s Underweight rating on AI stock

Not only did Singh cut its price by 35.4% in less than a month, three other firms also made cuts.

JMP Securities analyst Patrick Walravens cut its target price from $96 to $59. He did maintain a Market Outperform rating, however. Needham analyst Mike Cikos cut its target from $103 to $26 while issuing a Buy rating. Lastly, Piper Sandler (NYSE:PIPR) analyst Arvind Ramnani cut his target by $12 to $28. He rates C3.ai Overweight. 

Those are some severe price cuts. 

The good news is that Morgan Stanley is the only one of the four with a negative AI stock rating. A total of 10 analysts cover C3.ai with ratings all over the place with four Buys, three Holds, one Underweight, and two Sell. The median target price is $26. 

The analysts might be skeptical, but C3.ai’s latest quarter is the best in its history. Forget what the consensus is for the company. Chief Executive Officer and founder Tom Siebel has the company on the right path.

Here’s why. 

AI C3.ai, Inc. $22.76

Q3 2022 Results Should Have Been Good for AI Stock

The company reported its third-quarter (Q3) 2022 results on Mar. 2. Despite delivering 42% revenue growth in the quarter, its stock has gone sideways in the month since its announcement. As a result of its sales in the quarter, the company raised its guidance to 38% year-over-year growth in fiscal 2022 (April year-end). 

A big reason for analyst skepticism is the revolving door for the chief financial officer (CFO) position. On Feb. 25, the company announced the resignation of Adeel Manzoor as CFO after only three months in the post. Manzoor was replaced on Mar. 1 by acting CFO Juho Parkkinen, the third CFO in 17 months. 

While that is often considered a red flag, Siebel’s experience in the tech industry suggests he has high standards that not everyone can meet. As the company grows, it will take quality talent to keep it moving in the right direction. When there is not a good fit, Siebel’s not going to be the one exiting. 

It is what it is.

Getting back to its Q3 2022 results, the company had adjusted earnings per share loss of 7 cents, 20 cents better than the Zacks consensus estimate. On the top line, sales were 4.18% higher than analyst expectations.

Regarding gross profits, its non-GAAP gross margin in the quarter was 79.9%, 400 basis points higher than Q3 2021. It finished the quarter with 218 enterprise customers, 82% higher than a year earlier. Its Remaining Performance Obligations (RPOs), its backlog, increased by 90% to $469.3 million, or 168% of its Q3 2022 annualized sales. 

It might be losing money — $133 million through the first nine months — but it has more than $1 billion in cash if you include short-term and long-term investments. 

It has got plenty of capital to carry out its business plan. 

What Is its Business Plan?

I last wrote about C3.ai in late January. At the time, I argued that it was entering value territory despite losing money. I suggested AI wasn’t getting a reasonable price-to-sales (P/S) multiple. I gave several comparative examples.

On Dec. 23, 2021, Jim Cramer said on CNBC that he doesn’t like companies that lose money like C3.ai. The only money-loser he’d buy is Snowflake (NYSE:SNOW). It trades at 72.6x sales,” I wrote on Jan. 28. 

C3.ai currently trades at 10.5x sales compared to 57x sales for Snowflake. SNOW is down 31.2% YTD compared to -27% for AI. In the latest fiscal year, Snowflake lost $750 million, about 4 times of C3.ai’s losses. While Snowflake has a lot more annual revenue, the difference in P/S is not warranted.

As Tom Siebel stated in its Q3 2022 conference call, the company is on a quest to increase its customer base among small and medium-sized businesses. He stated:

“During the quarter, we executed 12 agreements of less than $1 million, three contracts between $1 million and $5 million, two transactions between $5 million and $10 million and three agreements in the range of $10 million to $50 million.”

A number that jumps out: Approximately 32% of its business in Q3 2022 was closed through its partnership with Baker Hughes (NASDAQ:BKR). Siebel is quick to point out that none of that business came from Baker Hughes. 

This pipeline of growth is real.

C3.ai Trades Over 40% Below IPO

C3.ai opened its initial public offering (IPO) at $42 a share in December 2020. That was $4 above the high end of its pre-IPO pricing range. It opened its first day of trading at $100. Someone felt it was worth three digits. 

Back then, it had only 30 customers. Now it is over 200. Either the valuation at its IPO was off, or investors have severely penalized C3.ai. From where I sit, the business has been dramatically improved over the past 15 months. Yet, it is valued for far less.

Siebel finished the conference call question and answer segment by stating he feels the company’s sales organization is back on track. The RPO growth in Q3 2022 is proof positive. 

I believe that AI stock is an unreal value at under $24. Between $24 and $30, it is growth at a reasonable price. 

If Tom Siebel fails to get C3.ai’s share price above $42, it won’t be for lack of trying. Investors aren’t seeing the forest for the trees.

AI is a long-term buy.

On the date of publication, Will Ashworth 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.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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