1 super stock down 91%, you'll regret buying on the dip |  The Motley Fool

1 super stock down 91%, you’ll regret buying on the dip | The Motley Fool

C3.ai (IA -5.43%) pioneered a whole new industry known as enterprise artificial intelligence (AI). It breaks down technical and financial barriers to accessing AI for many industries that would not normally be associated with cutting-edge technology.

It has also attracted several partnerships with trillion-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 skyrocketing sales growth over the next few years.

Given that its stock is down 91% from its all-time high, this presents an opportunity for investors. Here’s why C3.ai is 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 perform complex tasks and analyze large volumes of data in a fraction of the time humans can. In fact, according to the McKinsey Global Institute, up to 70% of businesses will have adopted AI by 2030, adding $13 trillion to the global economy.

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

But C3.ai has also attracted recognition from the world’s top tech companies. Amazon, Microsoftand parent Google Alphabet are all collaborating with C3.ai to accelerate AI initiatives on 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 by writing 99% less code than would otherwise be required without C3.ai integration.

C3.ai had 236 customers at the end of the second quarter, an increase of almost 17% year over year, but it is about to become much easier for companies to join thanks to to a key change the company is making.

C3.ai transforms its revenue model

Until now, C3.ai generally billed its customers on a subscription basis for the use of its platforms. But it has recently embarked on a major shift to a consumption-based model, which will negatively impact its short-term revenue but should result in a substantial acceleration in longer-term growth.

Why? Because subscriptions are usually paid for in advance, and C3.ai knows roughly how much money it will earn from each customer contract in advance. Consumption-based revenues are instead paid in arrears, so it will take time for results to materialize as the company transfers more of its customers to this new arrangement.

It will also significantly shorten C3.ai’s sales cycle, as it won’t have to spend months negotiating contracts and prices. Instead, customers can immediately hop on board and start using C3.ai’s tools, incurring costs only for what they actually use. Although their expenses are lower in the beginning, they will increase significantly as usage increases. Over time, this could lead to much higher demand for the company’s AI solutions, where some of the acceleration in revenue growth could come from.

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

Data source: C3.ai.

The chart shows that C3.ai is currently in the first phase of this process, and this is the main culprit behind the company’s weak revenue growth of just 7% in the recent second quarter of fiscal 2023.

C3.ai has a major opportunity ahead of it, as do its investors

C3.ai places the value of its addressable opportunity at $596 billion, and it has a discernible first-mover advantage, with the backing of over 100 granted patents and pending applications globally.

The company is not yet profitable, as it is still 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 has more than $840 million in cash, cash equivalents and short-term investments on its balance sheet, which provides the company with a buffer to continue executing its strategy.

This brings us to the C3.ai review. The stock is down 91% from its all-time high, and the company is currently worth just over $1.4 billion. But after cashing out, that implies investors only value the company at around $600 million.

Yes, C3.ai’s revenue growth is currently slowing down and will likely be stable for the whole of fiscal year 2023. But in the next fiscal year, as C3.ai’s consumption-based sales model shifts to the Top gear, management expects revenue to increase by 30% (minimum).

For investors who are focused on the long term, buying C3.ai while it’s so heavily discounted makes a lot of sense.

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

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