2023-05-15 16:17:48 ET
Summary
- C3.ai, Inc. reported strong preliminary fiscal Q4 2023 numbers.
- The enterprise artificial intelligence company reported positive cash flows in FQ4 in a bullish sign that the $800 million cash balance is solid.
- The stock has a logical valuation of up to $32 based on an AI software company returning to solid growth.
Following a short seller report , the market attacked the C3.ai, Inc. ( AI ) business in claims the company wasn't a legitimate artificial intelligence, or AI, firm. Regardless of this view, C3.ai continues to ride the AI trend in enterprise software higher with growth rates that are starting to re-accelerate following a change to the business model. My investment thesis remains Bullish on the stock following the recent dip back to the low $20s.
New Model Working
One of the "so-called" rigorous claims of the shorts was the lack of revenue growth being reported by C3.ai. The enterprise AI company had already highlighted a plan to shift the business model to a transaction-based pricing method in a disruption to the short-term revenues, but a boost to the long-term revenues via the addition of more customers.
C3.ai just guided to preliminary FQ4'23 numbers , topping previous estimates. The company predicts revenue will now top $72 million in the April quarter following well received guidance for revenues to reach $70 to $72 million after a FQ3 where revenues were $67 million.
In fact, the FQ4 revenues are approaching record levels. Of course, the April quarter is the seasonally strongest quarter, so the July quarter could see some seasonal weakness, but C3.ai isn't going to see the huge dip like back in FY23.
The most crucial data point from the preliminary numbers were the closed deals during the quarter. C3.ai closed 43 deals during the April quarter with 19 pilots initiated during the quarter.
During the prior quarter, C3.ai was proud to only have a customer account of 236. The enterprise AI company added 27 deals during FQ3'23, up from only 20 in the prior-year period.
The company closing 43 deals during FQ4 is a huge step up in new customers. The 19 pilot customers will start off with low volumes, but once these customers ramp up over the next year, C3.ai will see revenues accelerate along the lines of the last couple of quarters where business has picked up.
The enterprise AI company even announced 3 deals for generative AI where C3.ai has a product suite that utilizes technologies from Open AI, Google, and others to build enterprise products for customers. The market wants the company to be the technology generator, but C3.ai is the technology integrator and platform provider for large enterprises that can't just use off the shelf generative AI programs for enterprise businesses.
Big Cash Asset
As revenues re-accelerate, the huge cash balance of C3.ai at over $800 million now quickly becomes a massive asset. As the company was reporting weak revenues and large cash burn rates, a lot of investors likely wrote off the asset assuming a large portion would be burned down to reach a profitable business.
During FQ4, C3.ai reported operating cash flows in the $29 million range with free cash flow around $19 million. For the FY, the company did burn up to $185 million.
The positive cash flows for FQ4 would suggest that Baker Hughes Company ( BKR ) made a large payment on the outstanding unbilled revenues. One of the biggest questions in the short report by Kerrisdale Capital was the large unbilled revenues of $88 million and a payment by Baker Hughes would help alleviate this concern.
C3.ai, Inc. has a plan to reach non-GAAP profits by the end of FY24 in a sign cash burn will dramatically drop this fiscal year. Again, the improvement in the sales trend is a very positive sign C3.ai will turn profitable with cash flows at least topping $700 million at the lowest point.
As the company rides the major AI wave, the stock will increasingly be seen as cheap. Analysts will have to increase revenue targets back towards the original FY24 levels as C3.ai jumps past FQ4 targets:
- 6x EV/FY24 revenues of $340M = $26
- 8x EV/FY24 revenue of $340M = $32.
Considering FY24 has already started, C3.ai, Inc. investors will soon start looking towards FY25 revenue estimates currently sitting at $376 million and likely to push towards $400 million as the AI wave accelerates growth.
Takeaway
The key investor takeaway is that C3.ai, Inc. continues to make strong progress towards turning the business around based on the new pricing model. Investors should continue to use weakness to buy the stock as C3.ai, Inc. rides the AI wave to the dismay of shorts.
For further details see:
C3.ai: Riding The AI Wave