C3.ai (AI) had been one of the strongest IPOs in 2020-2021 with the stock quickly popping to all-time highs. Some speculation believe the company achieved the quick success given their use of all the “buzz words” and their ticker simply being AI, though revenue growth of 35%+ and strong partnerships with the large hyperscalers provided a strong foundation.
In recent months, the significant rotation out of tech stocks piled on top of short interest being above 20% pushed the stock lower. Despite reporting a pretty strong Q2 results a few weeks ago, the stock has continued to be weak and is down a further 25% since reporting earnings, bringing the stock down over 85% from their all-time high in February 2021.
I had published an article on C3.ai a few months ago when the stock was trading at $50 and noted there seemed to be quite a bit of downside remaining in the name. Currently, the stock trades at just $25 and valuation has pulled back to a point where it’s very interesting to potentially start building a position in the name.
Revenue growth continues to beat expectations and with recent large contracts from Baker Hughes and the Department of Defense, it appears the company’s solutions are starting to gain credibility and traction in the market. On top of that, consensus expectations for FY2023 seem conservative and I believe the company could maintain their beat-and-raise mode for many quarters to come.
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With valuation retracting to just under 5x FY2023 revenue, I believe long-term investors could see upside from current levels. Yes, there will likely be some volatility in the stock over the coming quarters given short interest remains above 15%, but the combination of 35%+ revenue growth and increased investments in their sales organization should drive long-term growth.
Financial Review and Growth Opportunities
A few weeks ago, the company reported a strong quarter with revenue growing 41% yoy to $58.3 million and coming in above expectations for $57 million. Revenue growth during the quarter actually accelerated from the 37% yoy growth CAGR achieved during the past two fiscal years. I believe this demonstrates that the company has a long runway of growth remaining and recent contract wins (described later on) can propel growth for many years to come.