Over the past 24 hours (at the time of writing), C3.ai (AI, Financial) has seen its stock price increase by over 18%. This brings its gains to a staggering 139% over the past month amid continued hype for the latest developments in artificial intelligence.
For investors who have been watching the stock, this is a major turnaround after the stock had been in decline since its IPO. C3.ai is a leader in AI-based software solutions for large organizations. Following the tech selloff, there has been a fundamental shift in the AI landscape that is making investors bullish again. OpenAI recently launched its generative AI chatbot named ChatGPT, which took the internet by storm and went viral online. Recently, OpenAI has received a huge $10 billion investment from Microsoft (MSFT, Financial), which is seen as a major sign of the growth in the AI market. According to Fortune Business Insights, the AI industry is forecasted to grow at a rapid 20.1% compounded annual growth rate from $387 billion in 2022 to over $1.3 trillion by 2029. C3.ai is poised to benefit from this trend.
The AI hype and C3.ai
So how does overall growth in the AI market help C3.ai specifically? C3.ai has recently announced plans to launch a generative AI product suite that will integrate directly with platforms such as the viral ChatGPT and even a competitor from Alphabet's (GOOG, Financial)(GOOGL, Financial) which is rumored for release very soon. C3.ai will make this suite of tools available as early as March 2023, thus a rapid release is pending.
One key application of the business is to provide “Enterprise Search,” which aims to enable organizations to search and present huge amounts of data instantly. Large organizations have a major challenge with “siloed” data which is segregated across various departments on geographies. C3.ai’s product suite aims to unlock the power of this data using a natural language interface. The company hasn’t released further details on what this will look like.
One of C3.ai’s major customers is the U.S. Department of Defense. General Ed Cardon (former U.S. Army Cyber Command) called this technology a “game changer," saying he believes this could help dissolve the biggest barrier to affection action, which is access to accurate data and insight across an organization.
Overall product teview
C3.ai has created a SaaS development platform that uses an “abstraction layer” to offer a low code option for the easy creation of AI business products. Its use cases include customer relationship management, databases, supply chain logistics, ESG, law enforcement, machine reliability and many more.
The opportunity across this vast range of applications is huge and C3.ai already has a range of elite customers. These include oil giant Shell (SHEL, Financial), the U.S Air Force, defense contractor Raytheon (RTX, Financial), etc.
Financial review
C3.ai reported strong financial results for the third quarter of 2022. Its revenue was $69.8 million, which increased by a rapid 42% year over year.
This was driven by strong customer growth, which increased by 82% year over year to 218. This may not seem like a large number of customers, but remember a substantial portion of these are enterprises or large government entities. Thus, they offer huge expansion opportunities and high retention. For example, in 2022, the company announced a staggering $500 million deal with the Department of Defense over a five-year period.
C3.ai has a strong gross margin of 66.7%, which would be expected for a company in the software industry. This is down slightly from the prior 77% margin in the first quarter of 2021, but this would be expected due to the high inflation environment.
The company did report a loss of $163 million for the third quarter, which isn’t great. However, upon further analysis, I discovered that the majority of its expenses ($124.8 million) are being invested in research and development. Overall I don’t deem this to be a negative sign as I believe a company such as this must continually reinvest for growth.
C3.ai does have a strong balance sheet with ~$1 billion in cash and cash equivalents and virtually no debt. This is a positive sign as the rising interest rate environment makes it more of a headwind to borrow.
The business also offers a $100 million share buyback program, which is extensive. This will reduce the share count and thus help to further accelerate the stock's value.
Valuation and guru investors
C3.ai trades at a price-sales ratio of 10.25, which has risen significantly recently as the stock price has popped (up 100% over the past month). However, it is still cheaper than its prior peak of 29 in the third quarter of 2021 and over 70 in 2020, during the tech bubble.
Renaissance Technologies, the world's best-performing hedge fund led by Jim Simons (Trades, Portfolio), purchased 8.86% more shares in the stock in the third quarter of 2022 according to its 13F filing. During the quarter, shares traded for an average price of $17.94, which is ~44% cheaper than where the stock trades at the time of writing. Legendary investor Paul Tudor Jones (Trades, Portfolio) also purchased the stock in the third quarter of 2022, as did Steven Cohen (Trades, Portfolio).
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Final thoughts
C3.ai is a leading AI software company that is poised to benefit from the huge growth in the artificial intelligence industry. Both from a hype perspective (stock price momentum) and the real industry-specific use cases which are expanding, I believe the outlook looks positive. Its integration with OpenAI is set to provide access to world-class technology for major enterprises and military agencies globally. This is fairly unique as thanks to the hype surrounding OpenAI, its platform has been trained up by millions of users, which gives it a competitive advantage. Thus, C3.ai can benefit from piggybacking on this technology.
