C3.ai (AI +2.03%) was an early enterprise artificial intelligence (AI) company when it was founded in 2009. It has developed a portfolio of over 40 ready-made and customizable AI applications for businesses in more than 10 different industries to accelerate their adoption of this game-changing technology.
C3.ai just spent 18 months transforming its revenue model, and now it's reaping the benefits with accelerating revenue growth. The stock surged 78% over the past year to trade at $36.97 as of this writing. But it remains 77% below its best-ever level of $161, set during the tech frenzy in late 2020.
It will be a long road back to that all-time high, but the company is on the right track, and here's why the stock might be a great buy now.
NYSE: AI
Key Data Points
C3.ai is experiencing a surge in demand for its AI applications
C3.ai serves clients across government, energy, financial services, manufacturing, and other industries. Its AI models can be trained to predict a wide range of things from fraudulent transactions to serious equipment failures, saving its customers millions of dollars in downtime and lost income.
For example, in just six months, C3.ai analyzed 867 million rows of data to configure and deploy 50 machine-learning models for a global cement manufacturer so it could predict equipment failures. Now, those models predict failures with a 100% success rate, which allows managers to conduct predictive maintenance, saving the cement company $10 million each year.
Similarly, oil and gas company Shell uses 100 AI applications not only to monitor thousands of items of equipment for potential failures, but also to reduce carbon emissions in its production processes. At one of Shell's natural gas facilities, C3.ai helped reduce carbon emissions by 355 tons per day, which is the equivalent of taking 28,000 cars off U.S. roads each year.
The world's largest cloud providers -- including Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud -- have each partnered with C3.ai to offer its applications on their platforms. These partnerships are crucial because they helped close 27 of the 50 new deals that C3.ai delivered in the recent fiscal 2024 third quarter (ended Jan. 31).
Overall, C3.ai saw a whopping 80% year-over-year increase in the number of customer engagements during the quarter, which highlights the rapidly growing interest in AI in the corporate sector.
Revenue growth is accelerating
At the beginning of C3.ai's fiscal 2023 year (started May 1, 2022), the company told investors it would change the way it earned revenue.
Historically, customers would pay a subscription fee, and it would take a lengthy amount of time to negotiate the terms and pricing. The company now charges customers on a consumption basis instead. In other words, businesses will only pay for what they use, which means C3.ai can bring them on board far more quickly, and they can come and go as they please.
But C3.ai warned investors that its revenue would stall while it transitioned all of its existing customers to the new model. Throughout fiscal 2023 (ended April 30, 2023), its revenue growth had gradually declined and even dipped into negative territory briefly. However, as expected, the consumption model is picking up steam, and that growth is now reaccelerating.
In the first quarter of fiscal 2024, revenue jumped 11% year over year. It grew by 17% in the very next quarter, and then by 18% in the most recent fiscal 2024 third quarter, coming in at a record high of $78.4 million.
Image source: Getty Images.
Why C3.ai stock is a buy now
C3.ai is still losing money at the bottom line because it's investing heavily in growth drivers like sales and marketing, and research and development. It generated a net loss of $72.6 million in the third quarter, but that shrank to just $15.8 million after stripping out one-off and noncash expenses like stock-based compensation.
C3.ai has $723.3 million in cash, equivalents, and short-term investments on its balance sheet, so it can afford to sustain losses of that size for quite some time. However, the company will eventually have to prove to investors that it can generate a profit and sustain itself without requiring further cash injections.
Management's forecast suggests the acceleration in its revenue growth will continue, and the rapid increase in customer engagements makes that very likely. More top-line growth will certainly help the company achieve profitability. Plus, the demand for AI probably won't slow anytime soon given Wall Street estimates that the technology could add anywhere from $7 trillion to $200 trillion to the global economy in the coming decade.
As I touched on at the top, C3.ai stock has surged over the past year, but it's still trading at a steep 77% discount to its all-time high. Considering the upswing in the company's key results in recent quarters -- and its potential -- this might be an ideal entry point for investors who want to benefit from the AI boom over the next 10 years.
