Rarely do you see Wall Street analysts as divided on a stock as they appear to be on C3.ai, the artificial intelligence software company that came public last month.
The bottom line is that the bulls see a huge opportunity and potential for continued impressive growth, while the bears see a stock that has become dramatically overvalued in initial trading.
And on Monday, the bears had the upper hand.
Shares of C3.ai (ticker: AI) have been on a wild ride. The company went public on Dec. 8 at $42 a share; opened at $100, and has since traded as high as $183.90 on an intraday basis.
Several factors have contributed to the enthusiasm: admiration for CEO and founder Tom Siebel, also the founder of Siebel Systems; big investments that were made with the initial public offering from Microsoft (MSFT), which invested $50 million, and from an arm of Koch Industries, which took a $100 million stake; and a potentially gigantic addressable market.
The big run has stretched valuation beyond what some analysts find comfortable. C3.ai has a little more than 97 million shares outstanding if you assume the underwriters exercise the “green shoe” option on the stock offering. There are also 42 million deep-in-the-money employee stock options, with an average strike price of $5.57 a share. Throw those into the mix, and there are 139 million fully diluted shares; at the year-end price of $138.75, that suggests a valuation that is pushing $20 billion.
Keep in mind that C3.ai had revenue of $81.8 million for the six months ended Oct. 31, up 10.9% from the period a year earlier. In the April 2020 fiscal year, the company posted 71% growth, to $156.7 million. If you assume the growth rate in the second half of the fiscal year rebounds to 30%; that would indicate April 2021 fiscal year revenue around $200 million. (Most Street estimates are a little lower than that.) That suggests C3.ai is trading or close to 100 times current year sales.
The Street often pays extra attention to the analysts from the banks that led the underwriting—in this case, Morgan Stanley, J.P. Morgan, and Bank of America. And none of them are recommending the stock.
J.P. Morgan analyst Mark Murphy launched coverage with an Underweight rating and $84 target price, which makes him the biggest bear on the stock among the sell-side analysts. Murphy notes that the stock as of last week’s close was trading at 427% of the midpoint of the initial IPO filing range of $30 to $34 a share.
Murphy has nice things to say about C3.ai’s fundamentals. “At its core, C3 has solved for efficient, comprehensive, end-to-end, large-scale predictive analytics at scale,” he writes in a research note. “Companies can leverage C3’s general purpose software platform to build a wide array of AI applications, or deploy its applications for specific, high-value use cases.” But he says that his rating is “constrained by valuation,” which he finds to be “among the highest in software …despite estimated growth in line with peers, abnormal lumpiness [and] volatility and far larger forecast operating losses.”
Murphy concludes: “We see a negative risk-reward at these levels.”
Morgan Stanley’s Sanjit Singh picked up coverage with an Underweight rating and a $100 target price. For Singh as well, the issue is valuation. “C3.ai enables enterprises to rapidly build and deploy [machine learning] applications that can transform their business operations,” he writes. “With proven technology, we see a compelling growth opportunity ahead.” But he adds that with the stock trading at 61 times his calendar 2020 sales estimate, the company’s success “looks priced in,” leaving “an unfavorable risk/reward.”
The bulls are willing to look past the high valuation. Wedbush analyst Daniel Ives starts coverage with an Outperform rating and a $200 price target, the highest among the analysts who initiated coverage on Monday.
In a note that calls C3.ai the “LeBron of AI,” Ives writes that the company is “one of the more disruptive enterprise software vendors in the last decade with the company laser focused on the convergence of AI, big data, and cloud computing.”
Ives adds: “With a TAM [total addressable market] of $270 billion and a product portfolio that is unmatched in the enterprise landscape, we believe C3 has the ability to further penetrate enterprises and governments across the board over the coming years.“
Needham’s Jack Andrews is bullish as well, launching with a Buy rating and a $193 price target, citing a strong leadership team, a huge addressable market, and a highly differentiated software platform.
“Over time, we believe enterprises could standardize on a default platform for AI which would result in C3.ai’s solutions becoming the default software platform for Enterprise AI,” he writes.
At least nine analysts in total picked up coverage on Monday. Other bulls include Piper Sandler and JMP Securities. Canaccord, Deutsche Bank, and Bank of America issued hold or neutral ratings.
In late morning trading on Monday, C3.ai shares were down 10%, to $124.87.
Write to Eric J. Savitz at [email protected]
