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C3.ai Is Value in a Bottle as the Price Sinks Even Lower

Earlier in January, I suggested that the lower C3.ai (NYSE:AI) traded under $30, the more attractive AI stock became. Two weeks later, the company, whose digital twin software I like, has seen its share price fall by $5, down 84.5% over the past 52 weeks.

A stock image of a brain with the letters AI
A stock image of a brain with the letters AI

Source: shutterstock

As I write this, C3.ai’s share price is within $3.08 of sliding below $20. If you can buy shares of the artificial intelligence (AI) software developer under $20, aggressive investors absolutely should.

Here’s why.

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Considering the Crap Out There, AI Is Worth More

C3.ai’s current market capitalization is $2.4 billion. That puts its valuation at 11.15x trailing 12-month (TTM) sales of $210 million.

Based on the application software industry, I can find 22 stocks with TTM revenue between $100 million and $300 million trading on either the NASDAQ or the NYSE. Of those, 14 trade for more than 11.9x sales.

For example, Matterport (NASDAQ:MTTR), a company whose digital twinning software I like, had nine-month revenue of $84.1 million ended Sep. 30, 2021. On an annualized basis, that’s $112.1 million or 19.7x sales.

The work Matterport is doing with vacation rentals and other types of real estate will continue to help it drive sales. However, I have to wonder if C3.ai’s multiple should be better than Matterport’s.

Amplitude (NASDAQ:AMPL) provides digital optimization software that enables customers to make better decisions about product innovation and business growth. It’s data analytics software on steroids.

It has a market cap of $3.8 billion, TTM revenue of $147.9 million, and trades at 24.4x sales. Its sales appear to be growing slightly faster than C3.ai but not enough to justify a multiple more than twice the maker of AI stock.

On Dec. 23, 2021, Jim Cramer said on CNBC that he doesn’t like companies that lose money like C3.ai. The only money-loser he’d buy is Snowflake (NYSE:SNOW). It trades at 72.6x sales.

I could go on.

The point I’m trying to make is that C3.ai, despite having an industry veteran in Tom Siebel at the helm, doesn’t receive nearly as generous a valuation from investors as some of the other application software stocks out there.

Either AI stock is fairly valued, or Matterport, Amplitude and others are overpriced. My initial assumption is it’s the latter.

Where to for C3.ai?

When I look at C3.ai’s financial statement for the third quarter, I see a lot to like beyond the fact it loses money.

For example, in its most recent earnings report, its overall revenues increased 35% over last year. But as I said in December, the latest quarter saw sales increase by 41% year-over-year. Revenues are accelerating. That’s good.

Its subscription revenues have reasonably juicy gross margins of 78%, considerably higher than 51% for its professional services. As a result, its overall gross margin is 75%. By comparison, Apple (NASDAQ:AAPL), one of the best businesses on the planet, has a gross margin of 41.8%, 32 percentage points less than C3.ai.

A third interesting item is that the company’s Remaining Performance Obligations (RPO) increased by 74% YOY to $529.3 million on a non-GAAP basis. That too suggests that its business is getting stronger despite the $44.3 million non-GAAP operating loss so far in 2022.

So, it expects almost $250 million in revenue in 2022, with a non-GAAP operating loss of $104 million at the midpoint of its December guidance. Given it had nearly $1 billion in cash and short-term investments at the end of October 2021, along with zero debt, it’s got plenty to keep losing money for the next five years or more.

Unless something goes wrong and a massive unexpected loss ensues, shareholders won’t have to worry about it going bankrupt anytime soon. The company’s Altman Z-Score is 10.69, considerably above a score of three necessary to be in the Safe Zone.

The lower this stock goes, the better value it becomes.

I like C3.ai as a long-term buy for those investors who don’t mind an investment that’s currently losing money but possesses a whole lot of potential.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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