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C3ai: Busted IPO May Make Good Investment Opportunity

C3.ai (AI) was a very recognized and popular IPO back in 2020. It covered all the important technology themes such as artificial intelligence (AI), cloud investing, digital transformation, and others. The IPO was priced at $42 and ran up to over $180 in December 2020.

Since then, things have not been too pleasant for the company, and the stock is now considered a busted IPO as the current price now sits below its IPO price.

C3.ai is an enterprise AI software provider for accelerating digital transformation. The company’s software suite provides comprehensive services to build enterprise-scale AI applications more efficiently and cost-effectively than alternative approaches.

The C3 AI Suite supports the value chain in any industry with prebuilt, configurable, high-value AI applications for reliability, fraud detection, sensor network health, supply network optimization, energy management, anti-money laundering, and customer engagement.

Its cloud-agnostic approach also allows its customers to deploy their solutions in a multi-cloud/hybrid cloud environment. The company considers itself in the early innings of a $300 billion addressable market in the enterprise AI software market. It seeks exposure to many potential applications across multiple industries and business verticals.

Model-Driven Architecture

The company’s primary solution suite uses a unique model-driven architecture to accelerate delivery and reduce the complexities of developing enterprise-level AI applications for businesses.

The C3 AI model-driven architecture provides an “abstraction layer” that allows developers to build enterprise AI applications by using conceptual models of all the elements an application required, instead of being burdened by writing lengthy code. 

This provides the following significant benefits:

  1. Scalability – The ability to use AI applications and models that optimize processes for every product, asset, customer, or transaction across all regions and businesses.
  2. Rapid Deployment – Can deploy AI applications and see results in 90-180 days and subsequently rapidly roll out additional applications and new capabilities.
  3. Unlock Additional Sustained Value – This could total millions to billions of dollars per year from reduced costs, increased revenue, and higher margins.
  4. Confidence In Process – The ability to ensure systematic, enterprise-wide governance of AI with the company’s unified platform that offers data lineage and model governance.

Recent Financial Results

The company maintained its hyper-growth status as shown by its most recent quarterly results. Revenues increased 41% to $58.3 million of which subscription revenues were $47.4 million, an increase of 32% from a year ago.

Gross profits improved significantly and came to $42.3 million, an increase of 35%. An important metric for the company is Remaining Performance Obligations (RPO) which is a type of backlog statistic. RPO was $465.5 million, up from only $267.4 million a year ago.

The company is not yet profitable on both an operating level and an EBITDA level. Losses increased substantially, although primarily due to large increases in stock-based compensation.

One major highlight in the quarter was the company greatly expanded and restructured its strategic relationship with Baker Hughes (BKR). These moves increased the value of the contract to $495 million and extended the term from five to six years. Baker Hughes represents over 10% of total company revenues.

Valuation

AI is far from seeing profitability and won’t see positive free cash flow and net profits until we’re well into the next presidential administration. One Wall Street analyst who shall remain nameless values the company at 35x 2031 cash flow. That’s quite a crystal ball.

The company sells at 12x estimated Fiscal Year 2022 revenues, for what it’s worth. Luckily the company has $970 million in cash to hold them over for some time.

Wall Street’s Take

Turning to Wall Street, AI has a Hold rating consensus rating based on four Buys, two Holds, and three Sell ratings assigned in the past three months. At $52, the average C3.ai price target implies 86.2% upside potential.

Conclusion

I am neutral on AI stock as I believe busted IPOs traditionally represent good long-term investment opportunities. However, with free cash flow and positive earnings many years away, AI remains a speculative investment.

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