Thomas Siebel, the founder of Siebel Systems (later sold to Oracle (NYSE:ORCL)), took his company public, C3.ai (NASDAQ:AI) at $42 in December 2020. After peaking at $179 on Dec. 22, AI stock has drifted down to $58.74 as of May 5. However, it still trades at a very high valuation on a price-sales (P/S) multiple, despite a huge mediocre growth forecast over the next several years.
The company produced modest growth in its latest financial release. Revenue for its fiscal third quarter ending Jan. 31, was up 19% year-over-year to $49.1 million. This included $42.7 million in subscription revenue that was higher by 23%. As you can see, this is a SaaS company (software-as-a-subscription), that is growing quickly.
Maybe the market is more enamored with the fact that billionaire Thomas Siebel is behind the deal, rather than the company’s actual growth.
Unique Growth and Valuation
C3.ai is a unique artificial intelligence (AI) software company that has applications in a number of industries. The company claims to be the only enterprise AI software pure play. C3.ai’s slide deck says that the company expects to “establish a global market leadership position in enterprise AI software.”
The company claims to have clients in six fields, although one is vaguely called “manufacturing.” The other five are oil and gas, financial services, aerospace, utilities and energy sustainability.
The company’s slide deck section titled “Rapid Time to High-Value Outcomes” gives several examples of how effective its AI software works for clients. For example, a Fortune 50 bank, used the AI software in its securities lending division on a trial basis for 16 weeks. Then for the next 36 weeks, C3.ai’s software was put into “production development.” The net result was “14 billion in additional daily trades.”
Another example was a Fortune 400 company involved in healthcare manufacturing. After only 4 weeks in production development, the client had a “300% increase in unit production.” In other words, the AI software taught itself how to increase the production output for the company.
The company gives another example of an oil and gas company that “saved $28 million per year in avoided shutdowns.”
This adds up to high growth that could cascade AI software works for large enterprises. Seeking Alpha has analysts’ average revenue forecast at $181.6 million for the year ending April 2021. However, for next year ending April 30, 2022, they foresee reaching $240 million, or 32% higher.
That is a decent level of growth, but not necessarily worthy of C3.ai’s huge P/S multiple. For example, with its $7.2 billion market capitalization, AI stock trades for 24.6 times revenue for the year ending April 2022.
Where This Leaves AI Stock
On April 30, Barron’s reported that C3.ai’s third-largest shareholder, Baker Hughes (NYSE:BKR), with an 11.7% stake, was selling some of its shares. It got rid of 1.23 million of its 10.8 million share stake, or 11.7% of its holdings. Barron’s noted that the company did not give any reason, but noted that AI stock has been “slumping.”
Normally, I would say that this is irrelevant news. But in this case, profit-taking after a recent IPO is the likely reason. There doesn’t seem to be a connection between the two companies.
However, upon reflection, it seems obvious that Baker Hughes is probably the oil and gas client in C3.ai’s presentation. So why is an apparently satisfied customer selling stock? The sale is only 11% of its holding. So I don’t think any real logical inference can be made about their level of satisfaction with C3.ai.
Yes, AI stock has fallen a good deal from its peak, but it is still well above the IPO price. I fear that at 24.6 times sales for the next year, with only 32% sales growth the stock is still too high. At that price level, the company should have greater than 50% growth.
Moreover, C3.ai is still profitable and is forecast to make $1.04 losses per share next year as well. In fact, analysts do not foresee EPS profitability even through the year ending April 2024. Therefore, it seems that AI stock might have further to fall.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.