C3.ai (NYSE: AI) is an enterprise software and artificial intelligence (AI) provider and applications company. It was founded in 2009, focused solely on clean energy companies before switching to different organizations and government sectors with its two primary software solutions. The first is its C3 AI suite which allows customers to design and develop AI solutions. The second is its C3 AI applications which are industry-specific and can be immediately installed and deployed.
It has previously featured on the ‘CNBC Disruptor 50’ list and after a volatile start to life on the public markets, is it a good buy?
The bull case for C3.ai:
C3.ai is founder-led, with Thomas Siebel acting as the Chairman and CEO, and has high insider ownership. Siebel has an excellent 91% approval rating on Glassdoor, while the company has 4.5 out of 5 stars recognizing its positive company culture.
It estimates that its total addressable market will be $271 billion by 2024 at a 12% compound annual growth rate from 2020. The company also believes that it has a first-mover advantage in Enterprise AI due to its investment in products and technology over the last decade. Siebel previously stated that “we have clear technology leadership in the space”, with 4.8 million machine learning models churning out 1.5 billion predictions per day.
C3.ai is a software-as-a-service (SaaS) business, and in fiscal Q4, 2021, revenue was $52.3 million, an increase of 26% year-over-year (YoY). Subscription revenue made up 86% of its total revenue in 2021, which is a positive sign due to its predictability. It also has a relatively high gross margin of 76%, which remained stable while its subscription gross margin expanded to 81% in 2021. The company also expects revenue growth to accelerate in fiscal 2022 and is forecasting for 33-35% growth.
C3.ai attracts new customers through a “lighthouse” strategy which means that it gains large global adopters in particular industries. These companies are then proof of concept for other potential customers in their industries. It has many high-profile customers such as the U.S. Air Force, Shell, and AstraZeneca, which demonstrate that this model is viable and impressive for a company of its size.
Its customer count also increased 82% YoY to 89 in Q4 as it provides significant value for its customers. It currently has a relatively high average contract value of $7.2 million in 2021, which has decreased over the last three years but is a positive sign as it provides greater revenue visibility. It also demonstrates the diversification from ‘lighthouse’ customers to a greater variety of small, medium, and large businesses.
The bear case for C3.ai:
Customer concentration is a risk with C3.ai. In fiscal 2021, four separate customers accounted for a total of 57% of its revenue, which is high. However, the customer concentration levels decreased from 2020 where three separate customers accounted for 67% of revenue. High customer concentration creates a risk as losing one of these customers would negatively impact revenue.
C3.ai also has a history of regular net losses since it was founded. In fiscal 2021, it reported a net loss of $55.7 million, which narrowed YoY. The company is also trading at a high valuation of roughly 29x sales.
So, should I buy C3.ai stock?
Despite the high valuation and other risks, the company has a proven management team, strong revenue growth, and a vast market opportunity. With a $5 billion valuation, C3.ai appears to offer a reasonable risk versus reward scenario, and investors may want to buy a small position and add accordingly if the investment thesis is playing out.
Where is C3.ai headquartered?
C3.ai is headquartered in Redwood City, California.
Is C3.ai profitable?
No, C3.ai is not profitable and reported a net loss of $55.7 million in fiscal 2021.
Who has the voting power?
Thomas Siebel effectively controls the company with 75.8% voting power, according to its S-1 filing.
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Contributing Writer at MyWallSt
Colm's favorite stock is Virgin Galactic as it is representative of his visions for our world in the future.