Should you invest in C3.ai?

Large software ETFs such as the Nasdaq QQQ are saturated with large and mid cap companies, following the increase in AI investment by large firms such as Nvidia, Microsoft and Alphabet.

AI is currently employed the most in spam filtering, product recommendations and content creation. In recent times, the use of Open AI’s ChatGPT has caught the attention of mainstream media.

These factors have resulted in significant levels of investment by estabilished tech giants. However, there are also promising companies that do not have such high market caps.

Founded in 2009, C3.ai is offers a portfolio of AI services which can be integrated into businesses across any industry. The company currently has clients from over 19 different industries and has a market cap of $3.1 billion.

The stock has been underperfoming for the last couple of years. This is a result of the change in its business model from subscription to consumption based. Hence, the management team has stated that it would take around 2-3 years for the company to see significant growth levels.

Company revenues have increased by 21% to $87.2 million this quarter. This shows consistent growth over the last six years, marking the success of the company’s consumption pricing model. Predictions that demand for AI platforms to increase by 41% over the next five years had also resulted in expectations of further growth.

Estimates point to a 23% increase in revenue moving to 2025. The new business model has reduced friction for companies that are beginning to integrate AI systems in their business. The number of pilot projects undertaken by C3.ai has almost doubled, from 24 to 52 over the fiscal year.

With a low P/E ratio of 9.4, this stock could be a good bet for investors over a 5 year horizon because of its strong growth potential and attractive valuation. However, it is worthy noting that C3.ai’s partnership with Baker Hughes will end in 2025. Revenues are likely to take a significant hit in 2026 if the contract isn’t renewed. C3.ai is unlikely to go bankrupt anytime soon because of its large cash position of $763 million and low debt to equity ratio of 0.2.