- C3.ai has been one of the most hyped IPOs late in 2020.
- Despite the AI promise, the actual growth results appear underwhelming, even as the company has quite a few high profile clients.
- Slower growth and steep losses are key concerns amidst still a very steep valuation after shares have already lost two-thirds from the top.
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When C3.ai (NYSE:AI) went public in December 2020 I wondered if this artificial intelligence play was an intelligent investment as well. This came after shares tripled from the offer price, as I developed a cautious stance despite the promise of the business amidst a very high sales multiple, not necessarily backed up by current growth rates already.
For that reason, I developed a cautious stance, not to be misunderstood with a bearish thesis after shorting high-fliers and momentum stocks can be a dangerous endeavor. After all, shares started trading at $90 and just two weeks later had doubled to levels in the $180s. Shares started the year 2021 around these levels and after a gradual but steady decline in February and March, they are now trading at a low of $61, down two-thirds from the recent highs.
C3.ai was founded by Thomas Siebel back in 2009 with the intention to take advantage of changes in the IT landscape, including elastic cloud computing, big data, IoT, AI and predictive analytics.
The company focuses heavily on AI applications as investors have high hopes that Mr. Siebel can do the same for C3.ai as he has done for Oracle and Siebel Systems. These AI SaaS software applications can be used on all main systems and in a wide range of industries and purposes like inventory management, personal health, energy management and many more as the potential opportunities for AI to transform the world is huge.
The IPO was eventually priced at $42 per share, with the company selling more than 15 million shares at the time. This resulted in a net cash position of $1.05 billion as the company was valued at $4.05 billion at the offer price, for a $3 billion operating asset valuation.
This was somewhat understandable as the company has seen solid growth. The company generated $92 million in sales in 2018 on which an operating loss of $36 million was reported. Revenue rose 71% to $157 million in 2019 as operating losses doubled in actual dollar terms to $71 million, suggesting that relative losses have increased a bit. Disappointing has been the growth rates which were reported for the first two quarters of 2020. Revenue for the first six months of (the fiscal year) 2020 rose just 11% to nearly $82 million, although operating losses narrowed significantly to $18 million.
With sales growth having slowed to single digits, a $165 million run rate revealed a 18 times sales multiple at the offer price, yet that was a steep multiple given the slowdown in recent growth rates and the fact that shares exploded after the offering. When looking at the IPO just a few days after the public offering, shares had tripled already to $120, essentially pushing up operating assets to a 63 times annualized revenue multiple! This multiple, modest growth and losses made it very hard for me to justify that valuation.
Appeal Is On The Increase, But Far From Appealing
Since the public offering the most insightful action has taken place in the share price which, after more than four-folding from the offer price, shares have retraced two-thirds ever since.
On the corporate front, the company continued to report progress with leading players in the energy sector to transform the energy industry, as it furthermore added SAP CEO Jim Snabe to its board of directors. On the first day of March, the company reported its results for the third quarter (as the company's fiscal year does not rhyme with the calendar year) with first quarter sales up 19% to $49.1 million. This marked a small acceleration in the growth rate as adjusted operating losses came in at $11.9 million and GAAP operating losses were reported at $18.5 million, with the difference between both measures entirely resulting from stock-based compensation expenses. This is a very real expense in my book.
Using a current diluted share count of 96 million shares at $62 per share, the equity valuation of $5.95 billion includes just over $1.1 billion in net cash, for a $4.85 billion operating asset valuation. While growth had re-accelerated a bit in the third quarter, the run rate just a few million shy of $200 million, still works down to a 25 times sales multiple. Moreover, I am far from convinced about the fourth quarter guidance, as the company guided for fourth quarter sales between $50-$51 million, marking very little progress on a sequential basis. Worse, is that non-GAAP operating losses are seen between $27 and $28 million, a near $10 million deterioration from the third quarter.
Truth be told is that appeal has improved a bit. After all, the operating asset valuation for C3.ai has improved from 63 times annual sales in December to 25 times now, while growth has inched up a bit and new announcements have been made regarding partnerships and clients in the current quarter.
That said, the outlook for the current quarter is not convincing, certainly not if this goes hand in hand with a rapid increase in losses. While the bull case advocates a huge backlog in terms of revenue performance obligations, a great deal of that tied to Baker Hughes (BHI) one of the key clients (and shareholders) of C3.ai as the latest call has quite some questions about these obligations and the changes of these.
Hence, I can only conclude that while the appeal has improved a great deal given the movement lower in the share price, that is a different conclusion than saying that the situation is appealing as a 25 times sales multiple given the current pace of growth. The pace of growth, increasing losses and still a very steep valuation make it hard to justify appeal here, other than the great and long term promise of the wider AI field.
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This article was written by
The Value Investor has a Master of Science with specialization in financial markets and a decade of experience tracking companies via catalytic company events.As the leader of the investing group Value In Corporate Events they provide members with opportunities to capitalize on IPOs, mergers & acquisitions, earnings reports and changes in corporate capital allocation. Coverage includes 10 major events a month with an eye towards finding the best opportunities. Learn more.
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