Shares of C3.ai (AI 2.10%) are on a tear this year thanks to the hype surrounding artificial intelligence (AI), which delivered massive gains to investors who bought it at the end of 2022.
C3.ai more than tripled in 2023 so far. However, the stock pulled back significantly on June 23 after investors weren't wowed by management's comments during the company's investor day. Shareholders were disappointed by how fast it is improving its sales pipeline, having expected more from it. Shares of C3.ai have remained subdued since then, but this could be an opportunity for savvy investors to buy this high-flying AI stock because it seems capable of delivering more upside.
Let's look at the reasons why C3.ai stock could turn out to be a solid long-term pick, and also check how much upside it could deliver.
NYSE: AI
Key Data Points
C3.ai's growth is expected to accelerate significantly
C3.ai is a pure-play AI stock. The company provides an enterprise AI software platform, which its customers can use to design, develop, and deploy enterprise AI applications.
C3.ai is currently in a transformative phase thanks to a switch in its business model. The company is now offering its platform on a consumption basis instead of a subscription basis. While this change has caused a short-term slowdown in its growth, investors should focus on the bigger picture.
A subscription-centric model means that C3.ai and customers would have to enter into contract negotiations, and deals may take longer to materialize. Of course, the upside of a subscription model is that it gives C3.ai greater visibility into its future revenue stream while a pay-as-you-go model doesn't, but the latter has advantages as well. For instance, a consumption-based model is helping C3.ai strike more customer agreements and broaden its sales pipeline.
The company made 43 customer agreements in the fourth quarter of fiscal 2024 -- which ended on April 30, 2023 -- a jump of 59% over the prior year. For the full year, C3.ai's customer agreements were up 52% to 126. C3.ai's transition to the consumption-based business model began in Q2 of fiscal 2024, so the company has made impressive progress in the space of just three quarters.
C3.ai is now in the second phase of the transition, during which it expects to see an acceleration in the number of deals, so it won't be surprising to see the company sign more customer agreements. C3.ai claims that the number of qualified opportunities within its sales pipeline increased by more than 100% in the past year. This explains why its growth is expected to accelerate in fiscal 2024.
The company forecasts 15% growth in revenue to $307.5 million in the current fiscal 2024 year at the midpoint of its guidance range. That would be a nice improvement over fiscal 2023's uptick of just 5%. More importantly, C3.ai sees the third phase of its business model transition beginning in fiscal 2025, when revenue growth is expected to accelerate because a large chunk of its customers will have switched to the consumption-based model by then. Not surprisingly, the company's revenue is expected to grow at a stronger pace in the next couple of fiscal years.
AI Revenue Estimates for Current Fiscal Year data by YCharts
C3.ai should ideally be able to sustain its impressive trajectory for a long time to come given that the AI software market is expected to clock 31% annual growth through 2025 and generate $192 billion in yearly revenue, according to IDC. As a result, it is not surprising to see why analysts forecast C3.ai's earnings to increase at an annual pace of 51% over the next five years.
How much upside can investors expect over the next three years?
The chart in the previous section suggests that C3.ai could generate $480 million in revenue in fiscal 2026, which would end in April 2026. Assuming the company does hit that mark based on the catalysts discussed above and it can sustain its current price-to-sales ratio of 15, its market cap could jump to $7.2 billion after three years.
That would translate into upside of 71% given C3.ai's current market cap of $4.2 billion. The reason why I have assumed that the company can continue to command its current sales multiple even after three years is because of the potential acceleration in its growth as estimated above, and also because AI stocks have been commanding rich valuations. Nvidia, for instance, trades at 40 times sales, and it is expected to clock 21% annual bottom-line growth over the next five years.
Of course, C3.ai may be able to garner a higher valuation and deliver stronger gains once its growth accelerates and evidence emerges that the company can convert its massive end-market opportunity into actual revenue. That's why the pullback in C3.ai shares looks like an opportunity for investors looking to add an AI stock to their portfolios.
