C3.ai (AI 2.37%) went public four and a half years ago to some enthusiasm, but it now trades nearly 40% below its IPO price. The enterprise AI software maker initially impressed investors with its catchy ticker symbol, the flexibility of its modules (which can be integrated into an organization's existing software), and its rapid growth rates. Unfortunately, its growth cooled off, its losses racked up, and its customer concentration issues became more apparent.
On the bright side, C3.ai's top-line growth accelerated again in its fiscal 2024 and fiscal 2025 (which ended in April), and it extended its crucial deal with its largest client, Baker Hughes -- which accounts for more than 30% of its revenue -- for another three years. It also won more federal contracts, secured new cloud partnerships, rolled out fresh generative AI tools, and expanded beyond its core subscription model by introducing consumption-based pricing options.
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From fiscal 2025 to fiscal 2027, analysts' consensus expectation is for C3.ai's revenue to grow at a compound annual rate of 19%. But trading at 7.5 times this year's sales, C3.ai doesn't look cheap. It also doesn't expect to turn profitable anytime soon as it ramps up its spending on new AI services.
Assuming C3.ai matches analysts' estimates, and then grows its revenue by another 19% in fiscal 2028, but trades at a more modest 5 times forward sales, its market cap would actually decline by about 6% from $3.5 billion now to $3.3 billion over the next two years.
So instead of wondering if C3.ai will ever revisit its IPO price, it might be smarter to invest in two less valuable AI-driven stocks that could surpass C3.ai's market cap by 2027: Applied Digital (APLD 8.57%) and DigitalOcean (DOCN 3.35%).
Applied Digital
Applied Digital builds big data centers and rents them out to cloud and AI companies like Microsoft and Amazon. It has been a major beneficiary of the AI boom and has been transitioning into a real estate investment trust (REIT) -- a type of business that has particularly favorable tax advantages, but must pay out at least 90% of its taxable income each year as dividends.
Applied Digital currently operates five data centers, all of which are located in North Dakota, and it plans to open additional centers in South Dakota and Iowa in the near future. In 2023, it launched a first-party cloud infrastructure platform powered by its own servers in its own data centers. That business grew rapidly, but it was a capital-intensive strategy that awkwardly put it in competition with some of its biggest clients. That's why it recently announced that it was going to sell that business and streamline its operations amid its ongoing transition into a REIT.
From its fiscal 2024 to its fiscal 2027 (which will end in May 2027), analysts expect its revenue to grow at a compound annual rate of 48% and see it narrowing its net losses. However, those estimates don't account for the planned sale of its cloud computing segment -- which grew rapidly and accounted for about a third of its revenue in its latest quarter. The market's views will need to be revised if it completes that divestment. Applied Digital currently trades at 13.5 times its projected sales for fiscal 2025 -- pricier than C3.ai -- and has a market cap of $3 billion.
But if it divests its cloud business and plows that cash into quickly opening more data centers to serve the booming AI market, it could justify that higher valuation. If that happens, Applied Digital might just grow to eclipse C3.ai's valuation over the next two years.
DigitalOcean
DigitalOcean operates a cloud infrastructure platform that carves out tiny "droplets" of servers for smaller customers that don't need much computing power. That differentiates it from enterprise-oriented public cloud giants like Amazon Web Services (AWS) and Microsoft Azure.
The company scaled up its business by acquiring the cloud hosting and management software provider Cloudways in 2022, and it bought computing start-up Paperspace in 2023 to integrate GPU-powered servers capable of handling more complex AI workloads into its data centers. It serves more than 600,000 customers worldwide, and more than 500 of them generate more than $100,000 in annual recurring revenue -- so it's locking in larger customers as well.
Like C3.ai, DigitalOcean now trades about 40% below its IPO price. However, it's firmly profitable and its growth trajectory looks more predictable than C3.ai's. From 2024 to 2027, analysts expect its revenue and EPS to grow at compound annual rates of 14% and 12%, respectively, as the cloud and AI markets continue to expand. With a market cap of $2.7 billion, it trades at just 3.1 times this year's sales. But if it matches analysts' estimates, then grows its revenue by another 14% in 2028, and trades at a more generous 5 times its forward sales, its market cap could more than double to $6.6 billion by the final year. It could also be a tempting takeover target for a bigger cloud infrastructure company.
