C3.ai (AI 3.44%) endured a lot of volatility in 2024. After a subdued start to the year, shares of the pure-play provider of enterprise artificial-intelligence (AI) software rocketed higher toward the end of February following the release of the company's fiscal 2024 third-quarter results (for the three months ended Jan. 31).
The stock shot up more than 25% in a single day as it delivered a beat-and-raise quarter. The company's results showed that it could indeed capitalize on the growing need for AI software with its solid momentum. However, the gains were short-lived, and shares tumbled 32% since the beginning of March and are now down 12% in 2024.
Is C3.ai's pullback an opportunity for savvy investors in anticipation of solid gains over the next five years? Let's find out.
NYSE: AI
Key Data Points
A lucrative market could help accelerate C3.ai's growth
The enterprise AI market is predicted to clock a compound annual growth rate (CAGR) of 34% through the end of the decade, according to Grand View Research. The market's growth will be fueled by the need for generative AI applications such as chatbots, virtual assistants, speech recognition, and natural language processing, among others.
C3.ai is looking to tap this massive market with its platform, which allows its customers to design, develop, and deploy enterprise-grade generative AI applications. As third-quarter results indicate, customers are showing interest in its AI platform.
Management struck four deals in the $5 million to $10 million range last quarter, up from none in the year-ago period. The number of deals with a value between $1 million and $5 million increased from six to 10 in the year-ago period. Deals valued at less than $1 million increased an impressive 80% year over year.
Though the average total contract value of C3.ai's deals was down to $1.2 million in the third quarter from $1.9 million in the year-ago period, the higher number of deals that it is signing should help it offset that decline.
A key reason C3.ai is able to close more enterprise AI software deals now is because of its transition to a pay-as-you-go model from a subscription model. By removing the need for protracted negotiations associated with long-term subscription agreements, management believed that it would be able to accelerate its sales cycle and improve the adoption of its platform. The strategy seems to be working: It closed 50 agreements last quarter, an increase of 85% from the year-ago period.
The number of new pilot programs that C3.ai is engaged in with its customers increased 71% year over year to 29, indicating that it could continue winning new business by converting these pilots into new customers. The company also says that its potential pipeline of customers increased by 73% on a year-over-year basis last quarter. So top-line growth is expected to pick up from this year's estimated growth of 15% to $308 million.
AI revenue estimates for current fiscal year; data by YCharts.
How much upside can the stock deliver over the next five years?
The chart above indicates that C3.ai's annual revenue could jump to almost $446 million in fiscal 2026. The company generated $267 million in revenue in fiscal 2023, so the top line is expected to have a CAGR of 19% over the next three fiscal years. Assuming its top line increases at a 20% annual rate in fiscal years 2027 and 2028, annual revenue could increase to $642 million after five years.
Shares currently trade at 10 times sales, which represents a premium to the U.S. technology sector's average price-to-sales ratio of 7.2. Assuming the sales multiple is in line with the technology sector after five years, its market cap could increase to $4.62 billion. That would be a 48% increase from its current amount.
But C3.ai could command a higher sales multiple after five years if its growth indeed accelerates thanks to artificial intelligence, which is why it might be a good idea for investors to capitalize on this AI stock's recent pullback because it could deliver healthy long-term gains.
