C3.ai: Rare AI Value Stock That You Can Buy With Confidence

seekingalpha04-16

C3.ai, an enterprise AI platform, has seen its stock price decline while other AI stocks have soared.The company has been signing on more new deals, particularly with government clients, indicating a ...

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Well, all except for one name: C3.ai (NYSE:AI), the enterprise AI PaaS platform that is led by Tom Siebel, billionaire founder of Siebel Systems. Despite accelerating revenue growth, continued customer diversification, and growing global interest in deploying AI applications to rip out legacy enterprise processes, C3.ai has seen puzzling stock price pressure this year. And no, the company didn't have a huge valuation to unwind. Year to date, shares of C3.ai are down more than 20%, while rivals like Palantir (PLTR) have soared more than 30%. Data by YCharts Amid undue pessimism, it's time to revisit the bull case for C3.ai I last wrote a bullish note on C3.ai in January, when the stock was trading closer to $27 per share. Though I've sustained a loss on my position since then, I have enough conviction in this name to dollar-cost average my position downward and add more on the recent dip. There are a number of recent strengths to point to here. The company has been signing on more and more new deals, with both commercial and government clients. Revenue from federal clients has increased more than 100% y/y, and we note that while C3.ai began as a primarily commercial software vendor, peer Palantir generates half of its revenue from governmental clients, spelling out a large market opportunity for C3.ai. As a reminder for investors who are newer to this name, here is my full long-term bull case for C3.ai:   More widespread interest in generative AI provides multi-year secular tailwinds from C3.ai. C3.ai believes that the explosion of generative AI alone has expanded the company's total addressable market, or TAM, to be larger than the market it addressed in calendar 2022.  Growing government business. State/local government and federal deals represented more than half of C3.ai's bookings in its most recent quarter, finally opening up a market that has long been lucrative for AI rival Palantir.  Consumption-based business model unlocks tremendous growth potential. Other companies that have become successful growth stories through usage-based pricing include Snowflake (SNOW) and Twilio (TWLO), and this business model gives C3.ai the opportunity to start smaller with new clients and grow their business over time.  Industry diversification. AI is a \"horizontal\" technology, meaning it can be equally applied and benefited from by companies in any industry. Historically, C3.ai has concentrated in heavy manufacturing and oil, due to its relationship with Baker Hughes. More recently, however, the company has expanded applications in production to cover customers in financial services, healthcare, and other expansion industries for C3.ai.  Solid partnerships. C3.ai is well-embedded with Amazon AWS, Google Cloud, and Microsoft Azure, with specific enterprise applications that are optimized for different cloud environments. C3.ai's cloud-agnostic approach gives it broader reach across all potential customers.  Rich cash balances. C3.ai has about $700 million of cash, unencumbered of debt - giving it plenty of financial flexibility as it works toward its goal of hitting pro forma breakeven by the end of FY24. Cash burn is minimizing quickly.  Stay long here: C3.ai is long overdue for a rebound. Q3 download Despite a poor market reaction, C3.ai released very strong fiscal third quarter (January quarter) results in late February. Take a look at the earnings summary below: C3.ai Q3 results (C3.ai Q3 earnings deck) Revenue grew 18% y/y to $78.4 million, well ahead of Wall Street's expectations of $76.1 million (+14% y/y) as well as accelerating one point over Q3's 17% y/y revenue growth pace. In fact, as shown in the chart below, revenue growth has accelerated for five straight quarters now, hitting the strongest growth rate that the company has seen since Q1 of FY23: C3.ai revenue trends (C3.ai Q3 earnings deck) An explosion of general interest in AI applications has been a core driver here. The company signed on 50 new agreements this quarter (+85% y/y) and 29 new pilots (+71% y/y). As can be seen in the chart below, C3.ai has continued to lower the barrier to entry for newer clients, as more of its deals are coming from the <$1 million band (that being said, the company is also signing on a number of new deals in the $1-$5 million and $5-$10 million deal bands as well): C3.ai deal bands (C3.ai Q3 earnings deck) Furthermore, note as well that C3.ai - which historically had heavy exposure to the oil and gas industry, thanks to its sales partnership with Baker Hughes, is now well diversified across industries and customers. C3.ai industry diversification (C3.ai Q3 earnings deck) As shown in the chart above and as previously mentioned, more than half of the company's bookings in Q3 came from public sector clients. The company also has a much larger concentration of manufacturing and agricultural clients, which were virtually nonexistent in last year's bookings. Management continues to cite a healthy pipeline of deals going forward. Per CEO Tom Siebel's remarks on the Q3 earnings call:  The market for enterprise -- the market interest in enterprise AI is staggering. Virtually all commercial, military and government organizations are focused today on leveraging AI to improve their operations, optimize their processes and transform their businesses. Our qualified opportunity pipeline has increased by 73% from a year ago. Now this is led by C3 Generative AI opportunities. Our go-to-market with partners is driving strong pilot additions, and it's still in the earliest innings. In the third quarter, we closed 62% more bookings with our partner network than we did in Q2. 337% more bookings than a year ago. Bottom line, the market demand for enterprise AI products is overwhelming.\"  Also as previously noted, U.S. federal revenue grew more than 100% y/y, as C3.ai signed deals with the Department of Defense, the Missile Defense Agency, and the U.S. Air Force. Valuation and key takeaways At current share prices near $22, C3.ai trades at a market cap of just $2.74 billion. After we net off the $723.4 million of cash on its most recent balance sheet, the company's resulting enterprise value is $2.02 billion. Meanwhile, for the upcoming fiscal year FY25 (the year for C3.ai ending in April 2025), Wall Street analysts are expecting the company to generate $367.5 million in revenue, representing an acceleration to 19% y/y revenue growth. This puts C3.ai's valuation at a mere 5.5x EV/FY25 revenue, which sits well below Palantir despite a similar growth trajectory: Data by YCharts  In my view, C3.ai remains a no-brainer. Buy here at YTD lows with confidence.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427988388"}