Investment Alert: Buy C3.AI Under $17
Disclaimer: Ivy Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
The global artificial intelligence research market is estimated to be $119 billion in 2022 according to Precedence Research. It’s an eye-popping number but is dwarfed by the 2032 estimate, which is pegged at $1.1 trillion. What’s driving the growth is the adoption of AI in virtually every industry imaginable from medical devices to electric vehicles and from internet-of-things to robotics.
The challenge for most companies is building AI is nowhere near their sphere of competence. Yet, management teams know they must adopt it to stay relevant. That’s where C3.AI comes in. It offers companies a way to build AI applications on its platform and already serves top tier clients in industries ranging from oil & gas to utilities, and from healthcare to defense.
- The global artificial intelligence research market is estimated to grow from $119 billion in 2022 to $1.1 trillion in a decade, driven by AI adoption in various industries.
- C3.AI offers companies a platform to build AI applications, with top tier clients across industries, and has partnered with Alphabet, Amazon, and Microsoft.
- Fair value for the company is estimated at $23.79 per share, but a pullback to under $17 per share could provide a good margin of safety to invest.
Why Buy C3.AI?
The bull case for C3.AI is made more compelling by the fact that the “big 3” have all partnered with the firm; Alphabet, Amazon and Microsoft.
Partnerships and customers combined have resulted in tremendous revenue growth, up 38% last year, 16.9% in 2021 and 71% in 2020. Gross margins have stayed fairly steady around 75% over the past 3 years too.
To sustain its fast-paced growth, management has been spending more on SG&A, which increased from $97 million in 2021 to $173 million in 2022. And that in turn has weighed down EBIT, which has fallen further into the red from -$60 million to -$196 million over the same period.
In spite of the growing loss, shares rallied by over 100% earlier this year when ChatGPT launched, and the future of AI became clear. So what could spur the share price to higher highs?
One tectonic shift is management’s decision to embrace a consumption-based model vs a subscription model. This is more like a pay-per-use model as opposed to a contractual agreement to pay for a fixed term, and is more attractive to customers. It’s a model that few companies employ because product quality and customer loyalty must be very high to support it.
In the near-term, the transition can weigh on revenues but over time it is forecast to be more lucrative. Think of it in similar terms to Microsoft transitioning from selling software via DVD to offering it via the cloud on a subscription basis; monthly revenues are smaller, but longer term the lifetime value of customers increase.
How High Will C3.AI Go?
Right now, we see fair value sitting at $23.79 per share, which would suggest the company is almost fully valued. As a result, a pullback is needed to justify snapping up shares.
Under $17 per share, we see a sufficiently large margin of safety to justify pulling the trigger. The upside would be substantial and the risk relatively contained.