C3.ai: Turning The Tide

seekingalpha11-21 04:38

C3.ai's stock surged 25% on an expanded partnership with Microsoft, positioning Azure as the preferred cloud provider and C3.ai as a preferred AI application provider.The enterprise AI software ...

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DNY59/iStock via Getty Images  C3.ai, Inc. (NYSE:AI) spiked on an expanded partnership with an AI leader. The enterprise software company hasn't gotten the rightful respect for strong AI growth and the tide appears to be turning. My investment thesis remains Bullish on the stock, but investors will want to let C3.ai pullback before buying, after the 25% jump on Tuesday. Source: Finviz Old Partner C3.ai just completed a quarter where revenues grew at a 21% clip. The company has continued to signup a large amount of pilot deals to drive growth in the next fiscal year, but the stock hasn't really rallied this year until the Microsoft (MSFT) press release. Source: C3.ai FQ1'25 presentation  The AI enterprise software company announced an expanded strategic partnership with Microsoft. The stock rallied 25% on the news despite C3.ai already working with the AI giant and actively listing Microsoft as a prior partner. The new agreement involves positioning Microsoft Azure as the preferred cloud provider for C3.ai and establishes their AI enterprise solutions as a preferred AI application software provider on the cloud platform. In FQ1, the company announced that Google (GOOG) (GOOGL) Cloud had jointly closed 40 agreements in the quarter due to a campaign promoting the C3.ai state and local government suite of applications. As the company mentions in the press release, Microsoft and C3.ai have partnered to deliver enterprise AI solutions since 2018. The news probably isn't as impactful as the stock move suggests. Ignored Growth C3.ai changed to a consumption model about 2 years ago. The enterprise software company has consistently grown during this period, but the market has constantly overreacted to short-term results. The stock fell to the lows $20s after guidance for FQ2 was for sales of $88.6 to $93.6 million, slightly below analyst estimates at the midpoint. The consensus analyst estimates have C3.ai targeted for growth of 24% in the quarter and going forward. The bizarre part of the story is that the market generally denies C3.ai as having AI technology. The company uses proprietary AI applications to work directly with LLMs to provide an enterprise platform of controls for up to 30 different generative AI solutions. The platform provides the cybersecurity, eliminates the hallucinations and protects the customer data at an enterprise scale. Either way, C3.ai is now growing AI enterprise software sales at a nearly 25% clip. The stock wasn't valued for this type of growth back at $21 when our view turned Bullish again on C3.ai. Investors should allow some of the Microsoft partnership excitement to wane before buying back into the stock. C3.ai now trades at nearly 11x FY25 sales targets of $383 million. Though, the opportunity is for the company to turn the 191 active pilot programs into faster growth. Out of 224 signed pilot deals, C3.ai still has over 85% active. The enterprise AI software company added a total of 52 pilots for AI alone in the September quarter for 117% growth YoY. These pilots generate limited revenues and could turn into sizable revenue streams in a few years, while the majority of expenses are incurred upfront to onboard the pilots via sales and product development. On the FQ1'25 earnings call, CEO Thomas Siebel further clarified the pilot financial impacts: The size -- the value of the pilots, the kind of the middle of the road, and I could be off here by 10% or 15%. But in the middle of the road pilot for enterprise AI application is $0.5 million, the middle of the road for a generative AI application is about $0.25 million. The value of the pilot -- and generative AI pilot usually takes three months to complete, enterprise AI pilot will take six months to complete, okay? And then we go into contract negotiated and they go live. We've given guidance before that we expect about 70% of our pilots convert to production contracts. I think that's about right. Remember, C3.ai started this process of moving to the consumption model about 2 years ago. The company wanted to expand to more accounts hesitant to sign large, multi-million dollar deals when the company only had 243 accounts at the end of FY22. The account total has nearly doubled in this period, and these initial pilot deals should start ramping up into sizable production deals. C3.ai could be at a point to report further sales acceleration back into the 30% range with these pilot deals maturing. The company reports FQ2 earnings for the period ending October on December 9. The opportunity is definitely for growth to start pushing above the 25% range, making C3.ai an appealing stock based on the FY26 sales targets to reach $462 million based on only 24% growth, as follows:  5x EV/FY26 revenues of $462M = $25 8x EV/FY26 revenue of $462M = $36  Despite reporting ongoing losses, C3.ai still has a $763 million cash balance while creating positive free cash flow in the last quarter. The stock is vastly cheaper with the $4 billion market cap offset slightly by the large cash balance. Takeaway  The key investor takeaway is that C3.ai has jumped on the expanded partnership with Microsoft. The stock isn't even expensive yet, but C3.ai is likely to pull back some heading into earnings, providing another opportunity to load up on the enterprise AI software stock.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"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":"4.29.1","shortVersion":"4.29.1","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/2485120491"}