C3.ai’s stock is crashing. Ticker symbol AI is down from a January high of $144, and now one of their big customers, and large investor, Baker Hughes sells a large block of shares. Should I start a position now, freak-out and sell, or buy the dip? This is what many of you are asking. So, let’s go and look at C3ai, and decide!
In the past I spent years working with Fortune 500 CFOs to help them determine where they were making money, and now use this knowledge to dig into C3ai’s details. Stick around to the end of this video, and I’ll share my current opinion.
The slide here, shows what I review before making an investment. We will cover some of this today. But this is not financial advice, and for entertainment only.
Hi investing friends, this is Lynn, and welcome back. So, Let’s go and review C3ai!
Let’s talk about what’s great about C3.ai. I am fascinated by this stock! We know that leveraging AI in business has huge potential. According to McKinsey, about 66% of companies using AI report that it has boosted their revenues, while 40% say it has reduced their costs. The AI boost all depends upon a deployment done right. Companies that do a good job leveraging AI have seen revenue increase by more than 10%, while some companies are using AI to cut costs by more than 20%.
C3.ai has pioneering a model-driven architecture, which represents a shift in AI application development process. This model-driven approach will now also enable Mid- and small-sized companies to leverage the power of AI.
C3.ai has created highly scalable AI models, and allows customers to build their own models by simply editing and stacking them one on the other. C3’s AI stacks enable lower operating costs and greater agility. I believe this scalable AI model, give C3ai a big competitive edge.
In their recent financial report, C3.ai supports the development of machine learning algorithms, data security, and cybersecurity techniques to address and advance solutions related to predictive analytics, resilient operation under faults and cyberattack, and assured system security. C3.ai DTI research is engaged in analyzing new business operation models, developing methods for organizational change management, developing advanced methods of protecting privacy, and advancing dialog related to the ethical implications of AI.
The company is bringing new product families to market, such as C3 AI CRM powered by Microsoft Dynamics 365 and Adobe Experience Cloud, that we believe will develop into substantial recurring revenue streams for C3 AI.
Most of C3’s customers have tried and failed at developing AI on their own, sometimes at great expense, before turning to C3 for their solution.
C3ai stated that they are unaware of any end-to-end Enterprise AI development platforms that are directly competitive with their Product Suite. The commercial product offerings that were formerly positioned as functionally equivalent to C3 AI were GE Predix and IBM Watson, both multi-billion-dollar software engineering efforts backed by massive promotional campaigns; however. Now, C3ai does not encounter them in competitive situations.
C3ai has made a name for themselves in developing strong customer alliances and using these relationships to rapidly expand their business.
In 2019, they formed a strategic alliance with Baker Hughes, a $24 billion oil and gas services company. Baker Hughes has standardized on C3 AI for all internal use AI applications. Together they are now jointly marketing and selling Enterprise AI solutions to address the upstream, mid-stream, and downstream activity to oil and gas companies globally. C3ai is also leveraging the power of Baker Hughes, 12,000-person sales organization. This is an enormous sales presence!
In September 2020, C3ai entered into a strategic alliance with FIS, financial services, a $10.3 billion technology provider to the global financial services industry whose systems process 75 billion transactions per year worth $9 trillion. This alliance leverages C3 AI Anti-Money Laundering and C3 AI Securities Lending Optimization for FIS’ financial services businesses
In March 2021, C3ai announced a strategic alliance with Infor, an ERP technology cloud leader. Infor plans to market, license, and deploy C3 AI prebuilt solutions to Infor customers under the Infor brand. Infor and C3 AI expect to leverage both companies’ existing digital portfolios to collaborate integrated enterprise AI applications that can support specific industry needs. The initial focus will be on predictive maintenance surrounding Internet of Things, or IoT systems. The goal is to provide a more proactive and accurate maintenance strategy within Infor’s Enterprise Asset Management solution.
In addition, C3.ai has announced global alliances with AWS, Intel, and Microsoft to jointly market, sell, and service combined offerings across industry verticals. This is truly great news!
So you can see that C3ai has been busy building impressive alliances that should pay off big in the future.
Industry analysts estimate that organizations will invest $170 billion annually in digital transformation software by 2024. According to a leading consulting firm, companies will generate $13 trillion annually in added value from the use of these new technologies. This is the fastest-growing enterprise software market in history and represents an entire replacement market for enterprise application software.
C3ai has this to say about the competition. Today the market is awash in “AI Platforms” that claim the are solutions that design, develop, provision, and operate complete Enterprise AI applications, including Cassandra, Cloudera, DataStax, AWS IoT, and Hadoop. Also, AWS, Azure, and Google do offer elastic cloud computing platforms. In addition, each includes innovative libraries of microservices that can be used for data aggregation, ETL, queuing, data streaming, MapReduce, continuous analytics processing, machine learning services, data visualization, and more. They all appear to do the same thing, and they all appear to provide a complete Enterprise AI platform. While these products are useful, C3 believes, in reality, that none of these include the scope of utility necessary to develop and operate an Enterprise AI or IoT application. Each address only a part of the problem required to develop and deploy an Enterprise AI or IoT application.
Now, to help us understand exactly how C3.ai is doing and growing, we need to look at their financials. Keep in mind that C3ai is a new stock that just went public on December 8th, 2020. Stocks at this stage are rarely profitable, but I like to see an increase in revenues and cash raised from their own operations.
This C3ai income side shows a nice increase in revenues from 2019 through April of 2021, also with a great increase in gross profits. But there are many ways in which a company is allowed to massage these numbers within current financial reporting practices. So, it’s important to look at the Free cash flow, which is the cash that has been raise by a companies’ own operations, minus related expenses. They give a much clearer picture into a company’s financial health. You can see here that Cash flow increased from 2019 through 2020, but in 2021 slid back down to lower than it was two years ago.
This Finviz side shows that Institutions own close to 42% of C3ai’s shares, but that this number used to be 10% higher. Institutional ownership shows that fund managers believe in this stock’s future. Insiders own 13% of the stock, which is a reasonable amount. Their Gross Margin is huge: 75%, which is higher than 78% of other companies in the Software industry. This means that C3 has more cash to spend on business operations as compared to its peers. This is mainly due to their subscription model, which is a very profitable way to provide software. ON a positive note, C3’s sales have increased 25% quarter over quarter.
You can see here, that C3ai’s short float is a moderate amount at 7.58%, but their overall float is a concern at 76 million, which means that 69% of their shares are available for purchase. Clearly, it would take a huge number of purchases, likely from institutions, to cause this stock to runup in price.
Now let’s look at analysts forecasts for this stock. In the last three months this TipRanks side shows that 7 ranked analysts set 12-month price targets for AI. The average price target among the analysts is $101.57. This all looked really great at first until I, as usual, dug deeper into the individual analyst’s forecasts for this stock.
You can see here the analysts recommending a “buy” for C3ai stock, all have a negative average return related to their forecast price targets for this stock.
This next slide lists the only two analysts that have provided targets that have meant a positive return for an investment in C3ai. Anjit Singh has had an average 27% return, and Mark Murphy has had an average 46% return on his recommendations. Both of them are recommending a “sell” for this C3ai.
J.P. Morgan analyst Mark Murphy stated, “We continue to see unfavorable risk/reward at current levels given the relatively poor growth plus margin profile, vertical, and customer concentration and the potentially lumpy bookings cadence.”
This Insider Monkey article that just came out on July 13th, explained that stocks that are heavily bought by edge funds historically outperformed the market. They explain that investors should be aware of a current decrease in support from the world’s most elite money managers. Ten hedge funds have pulled out of C3ai since the 2020, 4th quarter.
So, with all this said, personally I am fascinated by C3.ai and looking to invest in this stock at some point. But for now, I will watch for the stock to pullback further, and their results improve to indicate that it is a good time to begin my investment. If you currently have a position in this stock, I’d love to hear if you plan to buy the dip, continue to hold or sell?