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C3ai Is Down 55% This Year. Is Now the Time to Buy?

By Anthony Di Pizio - Jun 10, 2021 at 8:51AM

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Platform artificial intelligence is an emerging industry with mammoth growth prospects. This company is at the forefront.

Few emerging technologies today are as exciting as artificial intelligence. We're witnessing its capabilities applied in new ways, from rapidly analyzing enormous amounts of data to boosting efficiencies in hardware and software. C3.ai (AI 2.15%) is one of the only companies in the world that develops artificial intelligence as a stand-alone service -- put simply, AI is the entirety of its business. 

Investors have shunned the stock this year as larger technology companies begin to work on artificial intelligence projects, sparking fears of mounting competitive threats. But C3.ai continues to grow revenue, narrow its losses, and it added 82% more customers in the fourth quarter of fiscal 2021 (ended April 30, 2021). Therefore, the over 50% dip in its share price year to date could be a big opportunity for those who want exposure to this space. 

AI biometrics scanning a person's face.

Image Source: Getty Images.

A unique business case

Imagine a company that needs to develop its own artificial intelligence (or machine learning algorithms), streamline its data analytics, make its cybersecurity more efficient, detect fraud, or even combat money laundering. It would require a substantial investment of both money and time to work through potentially thousands of hours of programming.

C3.ai offers thousands of pre-built applications that are proven to reduce the amount of required written code -- input by a programmer -- by a massive 99%. Consider the resources a company could save by going down this route rather than building an application from scratch. These offerings from C3.ai are also customizable with the ability to extend them to suit different needs. Put simply, the company offers artificial intelligence foundations that companies can build upon and adapt to (almost) their every need.

Perhaps the most incredible part of C3.ai is how quickly it can deliver its solutions. The company advertises that it can deploy a requested artificial intelligence project within three to six months of the first executive briefing -- a timeframe the company says is up to 26 times faster than using alternative technologies.

Improving financial performance

C3.ai is new to the public markets, listing in Dec. 2020. Despite a spirited opening rally with an all-time high of $183 per share, the stock is now languishing at about $62, near its all-time lows. It appears investors anticipated stronger operational performance almost immediately, but that's not always feasible in unpredictable, emerging industries. As a technology company, it's also part of a much broader cohort of companies that have sold off in recent months. 

The company is delivering on almost every metric from a financial perspective. It grew revenue 26% year over year in the fiscal fourth quarter and gross profit by the same percentage. Total revenue for fiscal 2021 came in at $183.2 million, which was a 17% increase from the prior year.

Like most software-as-a-service companies, C3.ai has big gross margins -- over 75%. Its net losses stem from persistent spending on sales, marketing, and research and development -- investments in the overall business to drive continued growth. A high gross margin provides the company an opportunity to build scale, the theory being that once the company is large enough with stable revenue, it could cut back on those costs to begin generating net profits for investors. 

Overall, the company narrowed its full-year net loss from $69 million in fiscal 2020 to $55 million in the latest year. With the 82% increase in new customers and an all-time high 91 applications in production, the company should see strong revenue growth and a further reduction in its losses over the next 12 months. 

Looking forward

Ultimately, C3.ai is the biggest player in the stand-alone artificial intelligence industry with over 4.8 million machine learning models across dozens of industries, delivering an impressive 1.5 billion AI-driven predictions per day. While larger technology companies might try to compete or develop models in-house, the cost and time savings this company offers are hard to ignore. 

With a $6.3 billion market cap as of this writing, it's still nimble enough to pivot toward growth areas when necessary, and the work it has done as such a (relatively) small entity provides some exciting insight into what it could achieve as it scales. 

Investors should keep an eye on revenue growth over the next couple of years, as the boost provided by its new customers should drive the company toward profitability.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends C3.ai, Inc. The Motley Fool has a disclosure policy.

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