The recent technology sector meltdown has created multiple great long-term buying opportunities. One of my favorites is in enterprise AI software application maker C3.ai (NYSE:AI). The AI stock price used to hover above $180. Today, it languishes around $70.
The steep drop can be chalked up to the stock’s stretched valuation (which came under pressure thanks to rising yields) and the company’s sluggish growth (which was highlighted by “just” a 19% revenue growth rate last quarter).
But both of these issues are overblown and unnecessarily short-sighted.
That is, AI stock is no longer richly valued considering the company’s enormous growth potential, and the sluggish 2020 results are a result of Covid-19 impacts on enterprise spending, which will fade out quickly in 2021.
Zooming out, the reality here is that C3.ai is one of the most compelling growth companies in the world today — pioneering a future must-have software platform for companies of all shapes and size — and AI stock has enormous upside potential from its current price tag.
So, if time is on your side, the investment implication here is obvious. Ignore the noise and buy the dip. Long-term, my numbers indicate that AI stock has 400% upside potential.
Here’s a deeper look.
AI Stock: The Future of Business
I’m a huge fan of AI stock long-term because what C3.ai is doing is basically pioneering the future of business.
Here’s the story.
Machine learning and natural language processing models have advanced to a point where businesses can deploy actionable AI-powered software to drive business functions. Think automated customer service agents, sales process recommendations, automated threat intelligence and prevention, and finance/IT ops automation, among various other applications.
This enterprise AI software is producing positive results. According to McKinsey, about 66% of companies using AI report that it has boosted their revenues, while 40% say it has reduced their costs.
But, there is a huge delta between “good” AI software deployment and “bad” AI software deployment. That is, some companies are using AI to increase revenue by more than 10%, while some companies are using AI to cut costs by more than 20%. But those companies are few and far between, with less than 10% of companies reporting either a 10% boost in revenues or 20% reduction in costs.
Why so few?
Because building scalable and effective enterprise AI software is hard. Really hard. It requires a lot of really smart engineers, data scientists, and programmers to do so correctly. And all those smart engineers, data scientists, and programmers are going to work for Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT), Apple (NADSAQ:APPL), Alphabet (NASDAQ:GOOG), and Amazon (NASDAQ:AMZN).
Only 6% of large businesses and less than 1% of small businesses even have a single data scientist on staff.
In other words, while Big Tech is using AI to drive double-digit gains in revenue and double-digit drops in costs, the rest of the business world is struggling to figure out how to even use AI.
That’s where C3.ai steps in.
Democratizing the Power of AI
At present, enterprise AI software is a tool being used very effectively by Big Tech and either being used ineffectively or not at all by everyone else.
C3.ai is changing that.
The company is pioneering a novel model-driven architecture, which represents a promising paradigm shift in the AI application development process that will ultimately democratize the power of AI so that its no longer a weapon used by Big Tech to crush everyone else.
In essence, C3.ai has pre-built multiple, highly scalable AI models in its ecosystem, and allows customers to build their own AI models by simply editing these pre-built models and stacking them on top of one another.
Think of building an AI application as a puzzle piece. C3.ai has the puzzle pieces and directions. All customers have to do to effectively utilize the power of enterprise AI, then, is piece together the puzzle pieces in a way that works best for them.
Importantly, the piecing together of these puzzle pieces is not rocket science. C3.ai does all the hard work of making the actual models. Customers simply have to pick which ones they want to use, and decide in what fashion they want to use them.
In some instances, coding and data science are still required. But not much. And C3.ai just released a new software platform called Ex Machina, which enables anyone to develop, scale, and apply AI insights without writing any code.
It’s a genius breakthrough to address the widening AI gap between Big Tech, and everyone else.
Eventually, every company from every industry and of every size will leverage the power of AI to enhance their business, increase revenues, and reduce costs — and most of those companies will do so using C3.ai models.
Of course, this reality bodes well long-term for AI stock.
Durable Competitive Advantages
C3.ai is more than just a pioneer in the field of democratized enterprise AI software. The company has a durable competitive advantage to protect its leadership position in this market.
That durable competitive advantage is in C3.ai’s data.
AI models are built on data. The more data AI models have, the better they perform. Data is everything in AI — and C3.ai has more data than anyone else in this space to build the best AI models.
C3.ai builds their AI models on top of data provided by and shared among customers. The more customers C3.ai on-boards therefore leads to more data integrations, which bolsters C3.ai’s proprietary data lake, and improves the efficacy of the AI models.
It’s a durable data advantage, which means that C3.ai will — for the foreseeable future — make, scale and deploy the best enterprise AI software models in the market.
That’s a big advantage for AI stock.
Enormous Upside Potential
Long-term, AI stock has huge upside potential from current levels. Indeed, my modeling suggests AI stock has about 5X upside potential.
Globally, companies spent about $3.6 trillion on IT in 2020. That number has been growing and will continue to grow at a 5% compounded annual growth rate for the foreseeable future, as technology continues to dominate the world. By 2030, global IT spending will likely hover around $4.6 trillion.
In 2020, enterprise AI software spending measured around $174 billion, or about 5% of IT budgets. By 2024, it’s expected to account for 7% of IT budgets. By 2030, I estimate 10% IT budget allocation to AI software spending, for total spend of $460 billion.
If C3.ai controls just 1% of that market, then you’re talking $4.6 billion in revenues by 2030. Operating margins should push towards 30%, as is standard for application software companies of this ilk. My modeling says that will lead to around in $10 in earnings per share.
A sector-average 35X earnings multiple on that implies a long-term price target for AI stock of $350.
Bottom Line on AI Stock
AI stock is one of the best growth stocks to buy amid the recent tech sector meltdown.
But it’s not the best growth stock to buy today.
Instead, the best growth stock to buy today is a company that reminds me of a young Amazon. Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
By uncovering early investments in hypergrowth industries, Luke Lango puts you on the ground-floor of world-changing megatrends. It’s how his Daily 10X Report has averaged up to a ridiculous 100% return across all recommendations since launching last May. Click here to see how he does it.