If post-IPO share price action is any indication, investors think C3.ai (AI -5.85%) is an incredibly promising company. After pricing at $42 per share, the stock has quickly skyrocketed above $100 and beyond in just two weeks on the market. C3.ai raised over $700 million in cash from the offering, and as of this writing, the company has a market capitalization of over $15 billion.
C3.ai generated $157 million in revenue during its 2020 fiscal year. The stock thus fetches an incredibly steep premium of nearly 100 times sales as of this writing, and I'd pause before jumping in headfirst.
What is C3.ai?
C3.ai describes itself as "the world's largest enterprise AI production footprint," but the term "artificial intelligence" gets casually tossed around a lot these days. What is it exactly?
Founder and CEO Thomas Siebel, an early executive at Oracle in the 1980s when global spending on IT was still small potatoes, explained C3.ai was established based on future software technology needs. Siebel has been vocal for years that massive shifts have been taking place since the start of the 21st century. Specifically, "elastic cloud computing, big data, the internet of things, and AI or predictive analytics" are necessitating massive transformational overhauls at large companies.
C3.ai cites in its prospectus that the global IT market is worth some $2.3 trillion now, and the company's purpose is to help organizations navigate the large and increasingly complex changes needed to keep pace with modern infrastructure needs. That's where AI comes in (basically, computer-generated analytics and automation). C3.ai's software platform integrates with a company's IT infrastructure, or it can be used to purpose-build applications, make predictions, and manage operations. Use cases are wide ranging, from customer relationship management to inventory optimization to energy infrastructure monitoring. The company went to market targeting some of the largest organizations around (the U.S. Department of Defense, Royal Dutch Shell, and 3M to name a few) to vet its offering.
A tech investment that checks plenty of boxes
Let's forget the ludicrous valuation C3.ai carries at the moment. Excluding that, this software platform checks plenty of boxes for those looking for disruptive high-growth investments. With $157 million in revenue last year, this is a small business that claims its addressable market is worth $174 billion in annual spending right now, with that figure expected to expand to $271 billion by 2024. Revenue growth clocked in at 71% year over year in fiscal 2020 (the 12 months ended April 30, 2020), though that pace slowed to just 11% year over year during the six months ended Oct. 31, 2020 (due to effects from the pandemic).
In the first half of fiscal 2021, gross profit margin on services rendered was a lucrative 75%. The company also generated an unadjusted net loss of $14.8 million -- although it's growth rather than profit that's the priority right now for the company. And in its pursuit of its large addressable market, C3.ai reported having $290 million in cash and equivalents at the end of October and no debt. That doesn't include the $700 million it just raised from the IPO.
And if a less tangible metric is what you're after, Siebel is a more than capable CEO with decades of experience in high tech. Siebel also sold his last start-up (Siebel Systems) to his former employer Oracle back in 2006.
Is the stock a buy?
Share price valuation and how "expensive" shares are make up an inexact science. Theoretically, the longer you plan on holding a stock and the higher the company's growth rate, the greater the premium an investor would be willing to pay to acquire a position. For me personally, based on where C3.ai is right now, the 98 times sales price tag is steep enough I say don't buy unless your plan is to hold the stock at least a decade or more.
Of course, I would argue the premium would be far too much if C3.ai's growth doesn't rally from the 11% year-over-year rate it reported in the fist half of fiscal 2021. It also isn't alone in offering AI-based software applications to enterprises, so expecting a quick return to expansion like what it disclosed last year might be a touch too optimistic. After all, 2020's most successful IPO, Snowflake, currently trades for (in my opinion) an insane 175 times expected current year sales. But it expects to grow at least 113% this fiscal year. Put simply, C3.ai is far from warranting its current price tag unless it reports a sharp rebound in sales during the second half of its fiscal 2021.
Thus, I'm staying on the sidelines, but I usually wait a quarter or two before pulling the trigger on a fresh IPO stock. Given C3.ai's fast rise out of the gate and yet-to-be-seen growth post-pandemic, I see no need to get hasty with a buy just yet.