1 Super Stock Down 91% You’ll Wish You’d Bought on the Dip

1 Super Stock Down 91% You’ll Wish You’d Bought on the Dip

C3.ai (AI -5.43%) has pioneered a brand new industry known as artificial intelligence (AI). It breaks down the technical and financial barriers to access to AI for many industries not normally associated with the advanced technology.

It has also attracted several partnerships with billion-dollar tech giants, and its customer base continues to grow rapidly. The company is currently transforming the economics of its business, which could lead to strong sales growth over the next few years.

As its stock is down 91% from its all-time high, this presents an opportunity for investors. Here’s why C3.ai is a dip worth buying.

C3.ai accelerates the adoption of artificial intelligence

Artificial intelligence is becoming a key enabler for a growing number of businesses, thanks to its ability to complete complex tasks and analyze high volumes of data in a fraction of the time humans can. In fact, according to the McKinsey Global Institute, up to 70% of companies will have adopted AI in some capacity by 2030, adding $13 trillion to the global economy.

C3.ai is one of the first enterprise AI solutions, providing both ready-made and customizable models to help businesses accelerate their adoption of the technology. It accepted bookings from companies in nine different industries in the recent second quarter of fiscal 2023 (ended October 31). The oil and gas sector is regularly C3.ai’s biggest driver of revenue as it increasingly uses AI to deliver cleaner production, and to predict failures in critical items of equipment to prevent environmental catastrophes.

But C3.ai has also attracted recognition from the world’s biggest tech companies. Amazon, Microsoftand Google Parent Alphabet all partner with C3.ai to accelerate AI initiatives across their respective cloud platforms. They also co-sell cloud services with C3.ai to increase customer adoption — on Amazon Web Services, a customer can build an AI application that wrote 99% less code than would otherwise be needed without C3.ai s integration.

C3.ai had 236 customers at the end of the second quarter, which was nearly a 17% year-over-year jump, but it’s about to get a lot easier for businesses to get on board thanks to one key move the company is making .

C3.ai is transforming its revenue model

Until now, C3.ai has generally charged its customers on a subscription basis for the use of its platforms. But it has recently begun an important transition to a consumption-based model, which will negatively impact its revenue in the short term but result in a significant growth acceleration in the longer term.

Why? Because subscriptions are usually paid in advance, and C3.ai knows approximately how much money it will earn from each customer contract in advance. Instead, consumption-based revenue is paid in arrears, so it will take time for the results to flow through as the company moves more of its customers to this new arrangement.

It will also significantly reduce C3.ai’s sales cycle, as it will not have to spend months negotiating contracts and prices. Instead, customers can get on board and start using C3.ai’s tools right away, incurring costs only for what they actually use. Although their expenses will be smaller in the beginning, they will increase significantly as usage increases. Over time, this could lead to much greater demand for the company’s AI solutions, which is where some of the acceleration in revenue growth could come from.

A chart comparing C3.ai's subscription and consumption revenue models.

Data source: C3.ai.

The chart shows that C3.ai is currently in phase one of this process, and it is the biggest culprit for the company’s slow revenue growth of just 7% in the recent second quarter of fiscal 2023.

C3.ai has a big opportunity ahead, as do its investors

C3.ai puts the value of its addressable opportunity at $596 billion, and it has a marked first-mover advantage, backed by more than 100 granted patents and pending applications worldwide.

The company is not yet profitable because it is still laser-focused on investing in growth. But in this tough economic environment, investors are actively selling companies that aren’t making money. C3.ai generated a net loss of $140 million in the first six months of fiscal 2023, but it does have more than $840 million in cash, equivalents and short-term investments on its balance sheet, giving the company a buffer to continue execute his strategy.

This brings us to C3.ai’s valuation. The stock is down 91% from its all-time high, and the company is currently worth a shade over $1.4 billion. But after withdrawing cash, that implies investors only value the business at about $600 million.

Yes, C3.ai’s revenue growth is currently slowing and is likely to be flat for the full fiscal year 2023. But next fiscal year, as C3.ai’s consumption-based sales model kicks into high gear, management expects revenue to grow by a whopping 30% (minimum).

For investors with a long-term focus, it makes a lot of sense to buy C3.ai while it is so heavily discounted.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the listed shares. The Motley Fool has positions in and recommends Alphabet, Amazon.com and Microsoft. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.

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