C3.ai (AI 3.52%) might just be the best artificial intelligence (AI) company most investors had never heard of. Until last month, at least.
On Dec. 8, C3.ai stock debuted on the New York Stock Exchange with a monster first-day pop, closing 120% above its $42 IPO price. As of Jan. 5, it was trading at around $119 a share -- almost three times its IPO price. For context, Airbnb and Palantir -- among last year's hottest market debutantes -- were up about 103% and 220%, respectively, from their IPO prices.
Energy company Baker Hughes (BKR 1.66%) and tech giant Microsoft (MSFT 1.65%) are both backing C3.ai, betting its AI technologies will transform enterprise software in much the same way that previous AI innovations have given consumers such things as Alphabet's Google's highly effective search engine, Netflix's algorithms, and digital assistants like Apple's Siri.
And that's just one of the many reasons why investors should keep an eye on the company.
Image source: Getty Images
What C3.ai does
Operating on a software-as-a-service (SAAS) model, C3.ai provides the building blocks for companies to create AI applications. It provides two main software solutions. The C3 AI Suite is an app development and runtime environment (hardware and software) that its customers can use to build and run their own AI applications. The company also offers C3 AI Applications -- ready-made applications that clients can install and use immediately.
What's so special is that C3.ai's tools enable companies to build AI applications fast and with less code -- significantly reducing development time. In some cases, they cut the amount of code that needs to be written by 99%. With C3.ai's solutions, some of the biggest companies in the world -- like Royal Dutch Shell and AstraZeneca -- are building and running AI applications in as little as four weeks.
Among C3.ai's clients is the U.S. Air Force, which uses its systems to help predict whether important weapons systems will be ready for deployment. According to a Department of Defense report, C3.ai's technology managed to identify a set of fewer than 100 aircraft parts -- out of more than 1,000 -- that were responsible for 90% of total aircraft downtime.
Another customer is Engie, one of Europe's biggest utility companies. According to a Forbes article, Engie used C3.ai software to analyze more than a billion data points to learn why one power source lagged another by 2%. Solving that problem saved the utility more than $125 million a year. Engie is now one of C3.ai's three biggest customers.
Why C3.ai deserves investors' attention
C3.ai operates in the massive, growing market for enterprise AI infrastructure and applications.
It estimates its total addressable market will grow from $174 billion in 2020 to $271 billion in 2024. And as new use cases for AI emerge every day, by the time we get to 2024, that number could be even bigger. With $157 million in revenue in the fiscal year that ended in April 2020, the company has barely scratched the surface of its growth potential.
But why favor (or invest in) C3.ai when so many other companies are eyeing the same market opportunities?
To start with, C3.ai was an early mover in this industry. It's invested hundreds of millions of dollars over the course of a decade, developing advanced technology that has proven itself at the highest level. These massive capital investments -- coupled with the valuable expertise C3.ai has gained so far -- give it a huge leg up on newer entrants.
According to CEO Thomas Seibel, many of C3.ai's clients have tried to replicate what it has built by combining components from other players such as Snowflake, Databricks, Datastax, H2O.ai, and DataRobot -- but came up short. Seibel claims General Electric spent about $6 billion on such a project before giving up.
Seibel also asserts that his company has taken the functionality of every software company involved in AI -- including Palantir and Snowflake -- and built their features into "one cohesive architecture."
While that's a bold statement, Seibel's got the pedigree to back it up. As employee No. 20 at Oracle, he has been at the forefront of enterprise software for decades. After leaving Oracle in 1990, he founded Seibel Systems, a pioneering customer relationship management (CRM) firm, which Oracle acquired in 2006. He left Oracle again three years later to kick-start C3.ai, bringing along key Seibel Systems executives. His extensive experience, coupled with his strong reputation and network, will help his current company attract talent and clients.
An early mover in a huge and growing market, run by battle-hardened industry executives? That's an exciting combination. And as long as the company stays the course, it will likely keep winning new customers and extending its early lead.
Should investors buy the stock now?
By now, it's not hard to see C3.ai is well-positioned to ride the boom in enterprise AI. Its revenue more than quadrupled from $33 million in its fiscal 2017 to $157 million in fiscal 2020, and there are good reasons to expect this momentum to continue.
It's no wonder, then, that investors are excited about the company -- C3.ai trades at a nose-bleed valuation of $11.5 billion, around 60 times sales. All things considered, I would suggest putting C3.ai stock on your watch list and waiting for a more reasonable entry price.
