C3.ai analysis: Is this every investor's dream in the form of ChatGPT's cheapest competitor?

Artificial intelligence has exploded in recent months. Specifically, with the advent of ChatGPT, there has been an absolutely incredible uproar in this sector. This has logically driven the price of all competitors sky high... or did it?

Artificial intelligence is probably the No. 1 topic right now

Technology companies have always been relatively expensive and highly valued by investors. All the more so when you're dealing with players in arguably the hottest sector today. But there may be exceptions.

A specific example might be C3.ai, with its absolutely luxurious and highly valued ticker $AI+1.2%. Its tickers have long been generally considered (and I have considered them) too risky. But I recently came across the company again, and at current levels it's getting interesting. At least that's the consensus of analysts who focus on the sector. I personally consider it unnecessarily risky, but for investors with a high risk tolerance, perhaps now could be an interesting title to follow! Let's get to it!

The price rise came along with the AI and ChatGPT boom

What is C3.ai?

C3.ai is an American software company that focuses on developing and implementing artificial intelligence and machine learning to solve business problems. The company was founded in 2009 and is headquartered in Redwood City, California.

As of yesterday, C3.ai had a market capitalization of approximately $12.3 billion. From a financial perspective, in 2022 C3.ai reported revenues of $583.1 million, which represented a 36% increase from the previous year. However, the company is still losing money, with a net loss of $155.6 million for 2022.

Several metrics are typically used when evaluating a company, such as market capitalization to sales, market capitalization to EBITDA, or share price to earnings per share. These ratios can help compare different companies in the industry and assess whether a company's stock is undervalued or overvalued in the market.

Because C3.ai is a relatively new company and is still losing money, it is difficult to assess its value using these indicators. Therefore, it is necessary to focus more on future potential and possible benefits to investors. Anyway, we will look at the numbers as well.

Results

C3.ai has projected next quarter's revenue of only $63.0 - $65.0 million. Compared to $62.4 million in revenue for the last reported quarter, this outlook isn't great. The poor outlook is mainly due to a change in their business model.

However, that may change. C3.ai has decided to switch to a pricing model based on "consumption." This change hurt results in the short term, but will likely benefit the company in the long term.

C3.ai previously focused on acquiring large subscription contracts. However, the current economic environment has made this difficult. An executive is unlikely to sign a multi-million dollar software contract if his company is laying off or in financial trouble. On the other hand, if a company can start using the software without a large financial commitment, it can get a better idea of the benefits it provides to its business and expand use accordingly. With the new pricing model, C3.ai could end up earning the same amount from each customer, making the outlook much better. Customer acquisition is likely to be much easier and less costly in the future.

For C3.ai, the most bullish scenario is that they can successfully transform their business and return to growth. The company is trading at a pretty solid price and if they can transform their business, the market will reward them accordingly.

Unfortunately, the fundamentals are a bit wild because of where the company is currently.

Risks

This is going to be a significant point. Because the risks are really big with this company. The biggest one, of course, is that the company may never be able to run its business profitably.

The transition to a consumption-based pricing model might not be smooth and their forecasts might be too optimistic. They could find themselves outcompeted and unable to thrive in their end markets. Given the boom in AI and the huge investment in the sector from the tech giants, this is entirely possible.

This is why the company is more suited to investors with a high tolerance for risk.

Either way, the potential here is also huge. The estimate of the size of the AI sector in 2025 is astronomical. Source

In terms of valuation, C3.ai is trading at levels that are somewhat rare in the software industry. The company trades at just 1.36x book value, 1.54x cash and 4.76x earnings. This is usually a sign that investors have become disillusioned with the company and no longer believe it will achieve profitability or generate significant value in the future. Experts are also speculating on another possibility -
some of the big fish could buy C3.ai and get a large portion of their purchase back in cash. For this reason, C3.ai could be an attractive target for private equity firms and other technology companies. While this type of speculation alone is not a reason to invest, it may provide some floor to the stock price.

https://www.youtube.com/watch?v=-7omoxd3u40

C3.ai is a company that the market doubts. If it can successfully transition to a new model, the market will reward the company. If it is unable to improve its value and profitability, the stock will continue to struggle.

By the way - I've also seen speculation that the ticker might now be the most valuable to other players. Definitely not a reason to buy, but an interesting thought :)

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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