C3.ai Stock: This is one to watch (NYSE:AI)
We’ve seen C3.ai’s (New York Stock Exchange:Amnesty International) the fundamentals as being too risky throughout its life as a public company, but at current levels, things are starting to get interesting. We believe C3.ai can outperform C3.ai Market expectations and current valuation are likely to make it a buying target. High-risk investors may want to consider taking a closer look.
C3.ai’s ability to beat expectations
C3.ai posted good results in the second quarter with subscription revenue growing 26% year-on-year. Overall revenue grew a disappointing 7%.
C3.ai guided for $63.0 – $65.0 million in revenue for the following quarter. Compared to the $62.4 million in revenue for the last quarter that was reported, that guidance isn’t great. The poor direction is mostly due to a shift in their business model.
C3.ai decided to switch to a consumption-based pricing model. This change has hurt results in the short term but is likely to bring long-term benefits to the company.
C3.ai used to focus on getting big subscription contracts. The current economic environment has made this a challenge. It’s hard for a manager to justify signing a multimillion-dollar software agreement if his company is laying off employees or is struggling financially. On the other hand, if a company can start using the software without making a huge financial commitment, they can get a better idea of the benefits it provides to their company and expand usage accordingly. With the new pricing model, C3.ai could end up earning the same amount from each customer and the optics would be much better. It will probably be much easier and less expensive to acquire customers in the future.
The revolutionary case for C3.ai is that they can successfully move their business and return to growth. The company trades at a competitive price and if they can turn their business towards the market then it will reward them accordingly.
C3.ai stock has been experiencing sharp declines for a while now. Most of that is due to the hype that was pumped into the stock after the IPO. The IPO price for 2020 was $42 a share, but the stock has soared to the $180 range before coming back to earth since then. While C3.ai has been pricey the whole time it’s been a public company, now might be a good time for investors to take a serious look here.
On a valuation basis, C3.ai is trading at somewhat rare levels in the software space. The company is trading at 1.36x on books, 1.54x on cash and 4.76x on sales. This is usually a sign that investors have soured on the business and no longer believe it will achieve profitability or generate significant value in the future. We can see that C3.ai traded at a nosebleed valuation at more than 75 times sales at one point before dropping since. This quick multi-squeezing may finally be over.
The company can buy C3.ai and receive a large portion of their purchases in cash. For this reason, C3.ai could be an attractive buy for private equity firms as well as other technology companies. While this type of speculation is not a reason to make an investment on its own, it can provide some cap on the share price as well as an optional option.
Some of the risks that C3.ai is exposed to are:
The company may never be able to operate its business profitably.
The transition to a consumption-based pricing model may not be smooth and their forecasts may be overly optimistic.
They could outpace the competition and be unable to thrive in their end markets.
For a loss-making technology company, those stakes are significant. Investors will want to make sure they have a high risk tolerance and a long-term time horizon before considering buying stocks, even at such low prices.
C3.ai is a company that is being questioned by the market. If it successfully pilots the transition to a usage-based pricing model, the market will reward the company. If it can’t improve its value proposition, the stock will continue to struggle. At these levels, the company is beginning to look attractive to potential acquirers. For investors with a high risk tolerance and a long-term time horizon, it might be time to take a closer look here.