While people might have once scoffed at the term and dismissed it as nothing more than a product of science fiction, artificial intelligence is increasingly burrowing into every day life applications.
Take C3.AI, for example. It has grown from somewhat humble beginnings. The AI firm was originally created by Thomas Siebel in 2009 to provide the energy sector with enterprise software to assist with management.
It has since become a multi-billion-dollar enterprise AI software platform and application that has found use for predictive maintenance, fraud detection, inventory optimization, and predictive CRM, among countless other implementations.
Given the company’s success over the past decade or so, is C3.AI stock a buy?
C3.AI Top Line Growth Is Impressive
While only three quarters’ worth of financials exists for C3.AI, there’s still plenty to behold in the company’s latest quarterly report from Q1 of 2022, released at the start of September of 2021.
For Q1 of 2022, C3.AI’s revenue hit $52.4 million — up 29% year-over-year compared to the $40.5 million it earned for Q1 of 2021.
The company’s subscription revenue was also up 29% year-over-year, rising from $35.7 million to $46.1 million.
Additionally, gross profit for Q1 of 2022 was $39.4 million — a 75% gross margin — compared to $30.0 million for Q1 of 2021 — a 74% gross margin. That’s an increase of 31% year-over-year.
C3.AI Stock Price Forecast
Currently, C3.AI’s price per share is down about 71% from the company’s high of $161 per share, which it hit shortly after going public in December of 2020.
Looking forward to the quarters to come, financial analysts seem pretty torn on where C3.AI will go from here. Some see the company soaring all the way to $122 a share by this time next year, while others see the company making no progress — hovering near $45 — 12 months from now.
If we run a discounted cash flow forecast analysis, the upside projection for share price sits just under $70 per share, representing potential appreciation of 54%.
C3.AI’s Growth (or Lack Thereof)
The answer to the question of C3.AI’s growth depends on what kind of growth you mean.
In terms of sales growth, C3.AI was doing an exceptional job: the company saw 71% sales growth in its 2020 year, which was an improvement over its 48% growth in its 2019 fiscal year.
Alas, while the 2021 fiscal year still saw sales growth for the company, it was much less than in years past: only 17%, down quite a bit from that 71% seen for 2020.
In terms of C3.AI share price growth, you only need to look at the drop from 71% to 17% to know that the company’s price per share plummeted at the news of this decrease.
Analysts blame this on the disappointing lack of higher-value contracts for the company, which were down as a result of the COVID-19 pandemic.
As a result of the pandemic, C3.AI’s average contract value fell 40% to $7.2 million for the fiscal year 2021, then fell again to $4.5 million for the first quarter of the 2022 fiscal year.
C3.AI’s Partner Ecosystem
While C3.AI’s average contract value might have fallen in recent quarters, the company is still working hard to promote its partner ecosystem. This includes making strategic alliances with companies that have similar goals to C3.AI’s, such as Google (GOOG) or Microsoft (MSFT) (more on this later), in an attempt to take advantage of the additional distribution capacity that accompanies these partnerships.
This partner ecosystem, if implemented to the fullest extent, could allow for C3.AI to bring in many new contracts through these alliances.
While the average value per contract might have shrunk, A3.AI could make up for it by increasing the sheer number of contracts.
Federal Contracts With C3.AI
One place where C3.AI hasn’t seen any indication of decreasing contract values is with the federal government.
During the first quarter of the 2022 fiscal year, C3.AI signed quite a few multi-year contracts that far surpass the duration and the value of those lesser contracts that are bogging down its numbers.
If C3.AI continues to bring in more and more contracts with the federal government, then the average contract value of the nongovernmental work wouldn’t matter nearly as much to retail investors and traders.
Time will tell if the company will be able to do this, however, C3.AI’s work with other major industries shows it’s more than capable of handling more contracts of this variety.
C3.AI’s Work With Tech, Oil, and Gas Industries
Let’s expand on the earlier mention of C3.AI’s work with Google and Microsoft.
For starters, the entire Google Cloud global sales and service organization has recently been permitted to co-sell and service the complete suite of C3 AI applications across the globe. Additionally, C3.AI has brought in more than $200 million through collaborations with Microsoft.
These collaborations include work with the United States Missile Defense Agency and the United States Air Force Rapid Sustainment Office along with Cargill, Ball, and Cummins. The sheer scale of these collaborations looks really great for C3.AI, without a doubt.
In addition to work with Google and Microsoft, C3.AI also has found great success with the oil and gas industry. As a matter of fact, these industries have come to rely on C3.AI’s technology for day-to-day operations.
These are the kinds of contracts that legitimize C3.AI and its technology, and it would do the company well to earn more of them.
The Bottom Line: Is C3.AI Stock a Buy?
While bearish investors certainly have plenty of legitimate points to raise with C3.AI on the surface level in the here and now, the truth is that the company has all the makings of a great growth stock bubbling just underneath the surface. Its sturdy base of gigantic companies within the tech and oil and gas industries is proof of this.
While some investors were turned away by shrinking contract sizes and less growth as a result of the pandemic, those with their eyes on the company’s future can see that C3.AI is a buy based on the significant potential for payoff that awaits investors down the line.
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