Missed Out on Palantir's Run-Up? My Best Artificial Intelligence (AI) Stock to Buy and Hold

The artificial intelligence (AI) sector has been on fire this year, with stocks like Palantir Technologies (PLTR) soaring more than 30% year-to-date. However, not all AI stocks have performed as well. C3.ai (NYSE:AI), the enterprise AI platform led by billionaire founder Tom Siebel, has seen puzzling stock price pressure this year, with shares down more than 20%. Despite accelerating revenue growth, continued customer diversification, and growing global interest in deploying AI applications, C3.ai has lagged behind its peers. But it's time to revisit the bull case for C3.ai, as the company's recent strengths and long-term potential make it an attractive AI stock to buy and hold.

C3.ai has been signing on more and more new deals, with both commercial and government clients. Revenue from federal clients has increased more than 100% year-over-year, indicating a large market opportunity for the company. As a reminder for investors new to C3.ai, here's my full long-term bull case for the stock:

1. More widespread interest in generative AI provides multi-year secular tailwinds for C3.ai. The explosion of generative AI has expanded the company's total addressable market (TAM) to be larger than the market it addressed in calendar 2022.
2. Growing government business. State/local government and federal deals represented more than half of C3.ai's bookings in its most recent quarter, finally opening up a market that has long been lucrative for AI rival Palantir.
3. Consumption-based business model unlocks tremendous growth potential. C3.ai's usage-based pricing gives the company the opportunity to start smaller with new clients and grow their business over time, similar to successful growth stories like Snowflake (SNOW) and Twilio (TWLO).
4. Industry diversification. AI is a "horizontal" technology, meaning it can be equally applied and benefited from by companies in any industry. Historically, C3.ai has concentrated in heavy manufacturing and oil, but the company has expanded applications in production to cover customers in financial services, healthcare, and other expansion industries.
5. Solid partnerships. C3.ai is well-embedded with Amazon AWS, Google Cloud, and Microsoft Azure, with specific enterprise applications that are optimized for different cloud environments. C3.ai's cloud-agnostic approach gives it broader reach across all potential customers.
6. Rich cash balances. C3.ai has about $700 million of cash, unencumbered of debt, providing it with plenty of financial flexibility as it works toward its goal of hitting pro forma breakeven by the end of FY24.



Despite a poor market reaction, C3.ai released very strong fiscal third quarter (January quarter) results in late February. Take a look at the earnings summary below:

Revenue grew 18% year-over-year to $78.4 million, well ahead of Wall Street's expectations of $76.1 million (+14% year-over-year) and accelerating one point over Q3's 17% year-over-year revenue growth pace. In fact, as shown in the chart below, revenue growth has accelerated for five straight quarters now, hitting the strongest growth rate that the company has seen since Q1 of FY23:

An explosion of general interest in AI applications has been a core driver here. The company signed on 50 new agreements this quarter (+85% year-over-year) and 29 new pilots (+71% year-over-year). As can be seen in the chart below, C3.ai has continued to lower the barrier to entry for newer clients, as more of its deals are coming from the <$1 million band (that being said, the company is also signing on a number of new deals in the $1-$5 million and $5-$10 million deal bands as well):



Furthermore, note as well that C3.ai - which historically had heavy exposure to the oil and gas industry, thanks to its sales partnership with Baker Hughes, is now well diversified across industries and customers. As shown in the chart above and as previously mentioned, more than half of the company's bookings in Q3 came from public sector clients. The company also has a much larger concentration of manufacturing and agricultural clients, which were virtually nonexistent in last year's bookings.

Management continues to cite a healthy pipeline of deals going forward. Per CEO Tom Siebel's remarks on the Q3 earnings call:

"The market for enterprise AI is staggering. Virtually all commercial, military, and government organizations are focused today on leveraging AI to improve their operations, optimize their processes, and transform their businesses. Our qualified opportunity pipeline has increased by 73% from a year ago. Now this is led by C3 Generative AI opportunities. Our go-to-market with partners is driving strong pilot additions, and it's still in the earliest innings. In the third quarter, we closed 62% more bookings with our partner network than we did in Q2. 337% more bookings than a year ago. Bottom line, the market demand for enterprise AI products is overwhelming."

Also as previously noted, U.S. federal revenue grew more than 100% year-over-year, as C3.ai signed deals with the Department of Defense, the Missile Defense Agency, and the U.S. Air Force.



Valuation and key takeaways

At current share prices near $22, C3.ai trades at a market cap of just $2.74 billion. After we net off the $723.4 million of cash on its most recent balance sheet, the company's resulting enterprise value is $2.02 billion. Meanwhile, for the upcoming fiscal year FY25 (the year for C3.ai ending in April 2025), Wall Street analysts are expecting the company to generate $367.5 million in revenue, representing an acceleration to 19% year-over-year revenue growth. This puts C3.ai's valuation at a mere 5.5x EV/FY25 revenue, which sits well below Palantir despite a similar growth trajectory:



In my view, C3.ai remains a no-brainer. Buy here at YTD lows with confidence.