Thesis
Recently, C3.ai (NYSE:AI) has faced volatility in stock prices, prompting uncertainty among investors. Concerns about the company's ability to achieve sustained profitability in the face of its competitors make predicting its future a complex task. However, C3.ai's revenue growth, expanding customer base, and good management provide a glimmer of hope for their long-term prospects. With that in mind, investors should be incredibly attentive to all the factors that are involved when gauging the prospects of C3.ai, which this article attempts to cover.
Strong Team of Industry Giants
C3.ai faces quite stiff competition from established players in the software industry, including large enterprise vendors like Microsoft, Amazon, and IBM, all of which have launched AI software solutions. Emerging competitors, like Palantir and Nvidia, pose competition as well.
C3.ai differentiates itself from its competitors through its domain-specific AI platform, which serves a wide range of industries and was built to be easily integrated with other product offerings and cloud-based platforms. This demonstrates a large willingness to pursue industry partnerships with major players like Google, Amazon, and Microsoft. Integrating their product offerings into established cloud platforms increases their chance for longevity while they concurrently form a concrete customer base in industries like oil/gas, federal defense, and healthcare. These types of relationships already comprised >60% of their revenue in the last year. These differences can change the trajectory of their growth by increasing their cost optimization and helping them reach their target audience.
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C3.ai 10-Q
Finding Profitability and Strengthening Relationships
C3.ai's growth will revolve around its ability to maintain and grow its relationship with larger corporations to aid in its ability to serve a wider user base. Their growth will be largely contingent on their ability to maintain a lower take rate than the comparable cost of their partners internally developing similar product offerings for their clients. As a result, reinvestment into cost optimization and new technologies will be the driving factors to becoming profitable as their AI presence grows. This should translate into bigger and more secure contract renegotiations with their largest customers, like EY, PWC, Raytheon Technologies, and the U.S. Air Force.
While C3.ai's revenue traditionally stemmed from subscription payments, they have recently transitioned to a consumption-based pricing model. This restructure is meant to expedite and drive partnership formation, which tends to take longer to negotiate in an all-encasing subscription model, while matching costs to potential revenue. Furthermore, this recent transition prevents alienation by allowing clients to control utilization for specific products that serve them and their bottom line the best, this is especially relevant when integrating with Google Cloud and Amazon Web Services' extensive customer base. Continuing steps to strengthen their relationships and lessen costs will bring them closer to profitability, giving investors a reason for their high valuation.
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C3.ai 10-Q
Risks
C3.ai faces several risks which are mostly contained to their ability to maintain non-competitive relationships with their enterprise partners while being able to grow their profits and market share. Without these relationships their revenue growth prospects are fairly poor, so offering low-cost integration for new products they have developed or acquired is key. This becomes all the more difficult when the development of new products often causes operating costs to increase, which can't be fully absorbed by their consumers or partners if they don't want to lose the chance to renew their partnerships.
Additionally, continued failure to produce positive cash flows limits their potential to raise additional funds for reinvestment, a vital step of their business plan if they intend on meeting their valuation and maintaining market share. The industry is extremely competitive and there are several well-funded companies that offer similar, domain-specific product offerings to their clientele. Failing to innovate and integrate the most recent trends in AI technology will surely cause a decline in existing or potential market share, further damaging their revenue capabilities. If investors become disenfranchised by the brand's ability to generate positive cash flows, there is a good chance they will invest their money elsewhere.
Conclusion
The future of C3.ai is met with a mix of optimism and caution. While they have shown revenue growth and an increase in client relationships over the last few years, concerns about their fundamentals continue to worry investors. With a unique business model centered around domain-specific product offerings, consumption billing, and industry collaboration, there is still a chance for positive growth prospects in the long term. The next few months of C3.ai's performance will be crucial in determining whether C3.ai can beat out its competition and become one of the key players in the industry. $C3.ai, Inc.(AI)$ $Palantir Technologies Inc.(PLTR)$ $NVIDIA Corp(NVDA)$
SOURCE: SEEKINGALPHA
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