The S&P 500 index set a new all-time high in January, marking the official beginning of a new bull market. It has been on the rise since October 2022, when it finally bottomed after falling more than 20% (and into bear market territory).
But not every stock has followed the broader market to set record highs. C3.ai (AI 1.23%) rode the artificial intelligence (AI) wave in 2023, which sent its stock soaring 156%, but it's still trading 84% below its best-ever levels from 2020.
There is plenty of substance behind the hype for C3.ai's enterprise AI business, and the company recently showed a strong acceleration in its revenue growth. I think that trend will continue, which is why the steep discount in C3.ai stock could represent a fantastic buying opportunity.
NYSE: AI
Key Data Points
C3.ai is an on-ramp to AI for many businesses
Last year highlighted just how expensive it is to develop AI applications. It requires specialized data center chips from Nvidia, which can sell for up to $40,000 each -- and some AI workloads require thousands of them. Plus, a business has to aggregate data and build a large language model (LLM), or pay for a third-party option from a start-up or cloud providers like Amazon Web Services and Microsoft Azure.
That's why C3.ai is an attractive partner to hundreds of organizations across 10 industries, including the U.S. Department of Defense, oil and gas giant Shell, and financial services juggernaut Fidelity. C3.ai offers them 40 turnkey AI applications that can be tailored specifically to their needs.
Shell, for example, uses C3.ai to monitor more than 10,000 items of equipment to prevent catastrophic failures. Shell's infrastructure has more than 3 million sensors ingesting 20 billion rows of data every week, allowing C3.ai to make 15 million predictions every single day.
C3.ai serves as a great on-ramp into the world of AI, and demand is soaring. In the recent fiscal 2024 second quarter (ended Oct. 31, 2023), the company had 404 customer engagements, which increased by a whopping 81% compared to the year-ago period, and that growth is accelerating.
C3.ai continues to expand its product portfolio. It recently launched C3 Generative AI, which is LLM agnostic, meaning businesses can plug in their own models to create a functional AI application capable of generating content and answering complex questions. This could become extremely popular as the cost to develop LLMs falls over time, making them accessible to more businesses.
C3.ai is gearing up for much faster revenue growth
C3.ai is in the midst of a major transition. It used to generate revenue by charging a subscription fee for the use of its software applications, but that strategy required lengthy price negotiations with limited flexibility, which meant onboarding new customers was a slow process.
Around two years ago, C3.ai decided to shift to a consumption-based revenue model instead, which allows customers to sign up more quickly and only pay for what they use. It brings the company in line with most other providers of cloud-based software who charge in a similar fashion.
C3.ai warned investors its revenue growth would stall in the short term while the transition happened. True to that prediction, the chart below shows how revenue growth (orange line) fell off a cliff near the start of 2022, and it even contracted for a short period of time.
AI Revenue (Quarterly) data by YCharts
However, the chart also shows it's beginning to reaccelerate. Growth came in at 17% year over year in the recent fiscal 2024 second quarter, with revenue hitting a record high of $73.2 million.
The graphic below shows that C3.ai was at stage 5 of the transition in Q2, which corresponds with an expected uptick in revenue expansion. In other words, everything is progressing as expected, and C3.ai's revenue growth may have officially bottomed. If that trajectory holds up, there could be an even greater acceleration from here.
Image source: C3.ai.
Why C3.ai stock is a buy now
C3.ai is valued at just a $3 billion market cap as of this writing, so it's tiny compared to the trillion-dollar giants developing AI like Microsoft and Amazon. However, C3.ai stock outperformed both of those names in 2023, and the company's accelerating revenue and customer growth make a case for even more upside going forward.
C3.ai estimates it could deliver up to $320 million in total revenue during fiscal 2024 (ending April 30), which would represent year-over-year growth of 20%. That's more than triple the growth rate it delivered in fiscal 2023.
One drawback is C3.ai's lack of profitability. It generated a net loss of $134.1 million through the first six months of fiscal 2024. However, after stripping out one-off and non-cash expenses (stock-based compensation accounted for $104 million alone during the period), its non-GAAP net loss was far smaller at $26.3 million.
The company is in a strong financial position, with $762 million in cash, equivalents, and marketable securities on hand (and no debt), so it can afford to keep investing in growth for the foreseeable future even if it operates at a small loss.
C3.ai stock might be down 84% from its all-time high, but that was set during the tech frenzy of late 2020, when the broader market was flooded with pandemic-era stimulus, leaving investors behaving irrationally. That steep discount might be an opportunity for new investors to come in and buy -- especially now that AI technologies have transitioned from science fiction to reality.
