Is C3.ai share a buy?
C3.ai‘s (NYSE: IA) the stock fell 10% on September 2 after the artificial intelligence software provider released its first quarter results. Its revenue increased 29% year-on-year to $ 52.4 million, beating estimates by $ 1.1 million. It posted a net loss of $ 37.5 million – up from a meager profit of $ 150,000 a year ago – but its loss of $ 0.37 per share still matched Wall Street’s expectations.
Should investors buy C3 after its post-earnings slump? Or is it still overvalued even after falling more than 70% from its 52 week high?
What does C3.ai do?
C3 first gained a lot of attention because its founder and CEO is Thomas Siebel. This seasoned executive previously co-founded Siebel Systems, an enterprise software company that sold to Oracle for $ 5.85 billion in 2005.
C3 provides AI algorithms that help companies plan maintenance routines, detect fraud, optimize their inventories, and strengthen their existing CRM (customer relationship management) systems. Its tools can be customized and integrated with a company’s existing software platforms, or delivered as pre-built cloud applications.
Image source: Getty Images.
Simply put, C3’s flexible tools can help large organizations streamline their operations, reduce costs, and make better data-driven decisions. It focuses on securing large “flagship” customers, such as 3M, Royal Dutch Shell, and Microsoft – whose seal of approval then helps C3 attract many small businesses.
When a hot IPO turns cold
C3 went public at $ 42 a share last December, opened at $ 100 on day one, and skyrocketed to $ 180 later in the month. But then the stock fell all the way to the high of $ 40.
C3’s revenue grew 88% in 2018, 48% in 2019, and 71% in fiscal 2020. These impressive growth rates have attracted a rush of bulls to its IPO. However, C3’s revenue grew only 17% in fiscal 2021. He blamed the sharp slowdown on the pandemic, which disrupted the energy and industrial markets, which represented the most of its income.
Image source: Getty Images.
C3 increased its customer base by 82% to 89 in 2021, but its average contract value fell from $ 12.1 million to $ 7.2 million. It increased its customer base 85% year-over-year to 98 in the first quarter, and its average contract value fell to $ 4.5 million.
On last quarter’s conference call, Siebel said the decline in the value of C3’s contracts would stabilize the “poverty” of its business model by reducing its dependence on large customers. This statement was unusual since most cloud software companies prefer to gain larger customers with higher contract values. However, C3’s adjusted RPO (remaining performance bonds) rose a further 28% year-on-year in the second quarter, indicating that its current contracts will deliver stable growth in the near term.
C3 expects its revenue to increase by 33% to 35% for the full year. It expects its growth to accelerate as the headwinds associated with the pandemic subside and it is upgrading its AI suite, launching new business applications and reaching more customers through its new partnership with Alphabet‘s (NASDAQ: GOOG) (NASDAQ: GOOGL) Google Cloud – in which Google co-sell C3’s AI applications alongside its other cloud services.
High valuations and growing losses
C3’s revenue growth looks decent, but the stock is still trading at 20 times this year’s sales, even though it is just above its IPO price.
This price / sales ratio may initially seem reasonable compared to those of similar companies such as Palantir (NYSE: PLTR), its AI and data mining counterpart, which is trading at 34 times this year’s sales. However, Palantir’s revenue grew 47% last year thanks to the resilience of its government clients during the pandemic, and it forecasts annual revenue growth of at least 30% from 2021 to 2025.
Selling power (NYSE: CRM), which also helps companies optimize their operations with AI-powered cloud services, is trading at ten times this year’s sales. It expects its revenue to grow 23% to 24% this year and more than double to over $ 50 billion by fiscal 2026. Salesforce is also firmly profitable, unlike C3 and Palantir. Some Salesforce customers use C3 tools in particular to improve their basic CRM platform.
C3 expects its operating loss to grow from $ 60.3 million in fiscal 2021 to $ 107 million to $ 119 million in fiscal 2022 as it ramps up its investments. During the conference call, CFO Dave Barter said the company will continue to “make thoughtful investments in the workforce in programs to accelerate our revenue growth.”
Is C3’s stock worth buying?
C3 will likely continue to grow as more companies look for new ways to optimize their businesses with AI services. However, its stock remains expensive, its losses widen, and there are many more attractive AI-related alternatives with stronger sales growth or lower valuations.
I didn’t like C3 when it was soaring near its historic highs last December, and I still don’t like it now. Investors should avoid it until it stabilizes the value of its contracts, cuts its losses and demonstrates that its partnerships with companies like Google will actually attract new customers.
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Suzanne Frey, executive at Alphabet, is a member of the board of directors of The Motley Fool. Teresa Kersten, an employee of LinkedIn, a subsidiary of Microsoft, is a member of the board of directors of The Motley Fool. Leo Sun owns shares of Palantir Technologies Inc. and Salesforce.com. The Motley Fool owns shares and recommends Alphabet (A shares), Alphabet (C shares), C3.ai, Inc., Microsoft, Palantir Technologies Inc. and Salesforce.com. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.