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Proprietary Data Insights Financial Pros’ Top AI Software Stock Searches in the Last Month
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Financial Pros’ Top 5 AI Software Stocks
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Artificial intelligence is the biggest wealth catalyst since the internet. Experts project that the market will reach $184 billion in 2024. By 2030, it’s expected to reach $827 billion, a 28.5% annual growth rate. However, not all AI companies are created equal. There are those building chips to power the future and those creating the software to harness them. C3.AI (AI) is one of the only companies focusing solely on enterprise AI, helping businesses develop applications and integrate AI into their operations. The stock caught fire during the initial AI hype before losing about 50% of its value. Still, it’s up almost 150% since the start of 2023. A recent surge in search volume by financial pros gave it more looks than even Microsoft (MSFT). Like all of you, we wanted to know whether this company was a flash in the pan or had true staying power. C3.AI’s Business Only a few companies are working specifically on enterprise AI: IBM (IBM), Microsoft, and C3.AI. The rest, like Palantir (PLTR) and Adobe (ADBE), have more specific applications. C3.AI’s platform allows users to quickly and efficiently develop, deploy, and operate AI and IoT (Internet of Things) applications at scale. Companies can choose from its prebuilt applications, such as CRM, demand forecasting, and schedule optimization, or use C3.AI’s development platform to program and deploy their own. 90% of the company’s revenues come from subscription renewal, while professional services make up the remainder. While the company has seen remarkable growth, many analysts question its competitive advantages. Microsoft already provides its CoPilot for the same verticals as C3.AI, such as finance, sales, and service. Plus, the larger companies come with deeper pockets to train more comprehensive models. Financials
Source: Stock Analysis AI’s sales have tripled since 2019. But the pace has been uneven. The biggest challenge is that the company spends quite a bit on R&D and SG&A. $215 million of that is a non-cash-based stock compensation expense. However, the company doesn’t generate cash from operations annually, though it did for the last quarter. We expect it to take some time before this becomes consistent as the accounts receivable continues to grow with the business. Like most software companies, C3.AI carries very little debt, allowing it to use all its cash for growth. And with $750 million on its books, it’s in no danger of running out anytime soon. Valuation
Source: Seeking Alpha C3.AI doesn’t generate a profit or cash from operations. However, if we extend the latest quarterly cash from operations, the company would trade at 40x cash flow. Yet, this is being rather generous. Palantir trades at a higher price-to-cash multiple, while Microsoft, Adobe, and IBM all trade at lower multiples. Interestingly, only IBM trades at a lower price-to-sales multiple, despite C3.AI’s 10.5x being rather frothy. Growth
Source: Seeking Alpha C3.AI’s sales growth is good. Yet, Palantir’s is consistently higher. And although Microsoft and Adobe are significantly larger companies, their growth rates aren’t too far below C3.AI’s. Only IBM is stuck in the doldrums. More importantly, Palantir, Microsoft, and Adobe have seen free cash flow rise over the past three years. Profitability
Source: Seeking Alpha C3.AI’s gross margins are quite low and worsening, which is a major concern since these are direct costs related to establishing their products. Only IBM runs margins in the 50s, with a much more diverse set of products and services. Our Opinion 5/10 While C3.AI was a first mover in the area, we don’t believe its products differ substantially from those of its competitors. That doesn’t mean we expect it to fail anytime soon. However, C3.AI needs to get itself to cash flow positive sooner rather than later. The company also needs to create a better brand that makes it the go-to choice for AI development and deployment. |
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