C3.AI is a pure play enterprise AI company with disruptive technologies and a huge total addressable market (TAM) of ~$300 billion. The AI stock price has dropped over 70% from its peak shortly after its high profile IPO debut. A low float with favourable economic environment and relatively high demand for the hot name (as one of the CNBC disruptor 50) might have been the cause of the price spikes. Since the share lockup expired, the stock has been under a lot of pressure with pre-agreed upon sales by insiders, including CEO Tom Siebel.
Growth and valuation
Based on the FY22 Q1 filings, the company has approximately 100 million shares outstanding. The stock price was $40.9/share on Nov. 18, 2021. So, the market capital is about $4.1 billion. The price/sales ratio for C3.AI is $4.1 billion/245 million = 17 based on the median value of the guidance on full year FY22 revenue ($243 ~ 247 million).
According to the guidance, FY22 Q2 revenue is expected to be $56 ~ $58 million (median $57 million), indicating +9.6% Q/Q growth (FY22 Q1 was $52 million). The 2nd half of FY22 would be $245 – $57 – $52 = $136 million, or about +25% growth over the first half of FY22. These results indicate accelerated growth in the coming quarters. This is consistent with CEO Tom Siebel’s comment that the company is going to accelerate its growth next year. The partnership with Google Cloud would dramatically increase the sales force by at least one order of magnitude – more boots on the ground likely lead to more revenue.
One reason the share price has not been doing great is the lumpiness of their revenue growth. This is mostly because it takes a long time to negotiate and settle on deals in sizes of millions. With more apps and cheaper products being added to the product portfolio and fast growing number of customers, the lumpiness would likely be addressed after a few more quarters as commented by the CEO.
As of the end of Q1 FY22, C3.AI has cash and short term investment on the order of 1 billion. So, the company would be in good financial health for the next few years.
C3.AI’s durable competitive advantages/moat
Dominant market position: The company is recoganized as an Industrial IoT leader by IDC Market.
Scalability: C3.AI has the world’s largest enterprise AI footprint.
Intangible assets: C3.AI has at least 6 patents on AI systems and methods. See a list of patents by C3.AI here.
Network effect: C3.AI has extensive partnerships with Google Cloud, Microsoft, Snowflake, Adobe, 3M etc. As more AI apps become available, its marketplace might be a great place to connect buyers to sellers.
Diversified customers: C3.AI’s solutions target a range of sectors such as energy, finance, customer relationship management (CRM) etc.
Early innings: C3.AI has a first-mover advantage to democratize AI development and deployment. The enterprise AI market is forecasted to grow at a compound annual growth rate (CAGR) of 35.4% from 2019 to 2026 ($53.6 billion).
Founder-led: Founder and CEO Tom Siebel is a reputable proven veteran in running growth companies and creating values for shareholders.
With its revenue growing at ~30%, and a P/S ratio of ~17, C3.AI looks like a reasonably priced company with sustainable growth for years to come. The growth might accelate next year with the help of its partnerships and a growing product portfolio. If it can get rid of the lumpiness in revenue growth as recorded in the past quarters, its valuation multiple might even expand. I believe C3.AI is a buy today.
Disclosure: I am long C3.AI (AI).