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C3.ai (NYSE:AI) is still having trouble shaking off the bears after it posted its most recent quarterly results. AI stock traded at $100 at the time. With the stock’s short interest piling up to around 10%, what will it take to win back the market’s confidence?

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However, C3.ai’s revenue forecast and its small loss for the year should not worry its shareholders. Although the software firm has many positive catalysts ahead, impatient investors may decide to sell its shares before they fall further. That would be a bad idea.

AI Stock Is a Pure Play on AI

In C3.ai ‘s third-quarter earnings press release, its CEO, Thomas Siebel, described the company as “well-positioned to establish a global market leadership position in enterprise AI software.” The company is actually the only enterprise AI software pure-play, and it has the resources to focus on key areas.

In Q3,  C3.ai ‘s revenue grew 19% year-over-year to $49.1 million. Most of the growth was generated from its subscription revenue which jumped 23% YOY and accounted for 87% of its total sales.

As the company’s addressable market in multiple sectors increases, investors may become more upbeat on its outlook. C3.ai  is indeed expanding its addressable market by selling its enterprise production solutions to new customers, including the U.S. Air Force and the U.S. Army.

C3.ai needs to prove the value of its offerings to the government. Once it does so, it will get bigger deals from Washington.

Opportunities Ahead

c3.ai’s investments in its products has enabled it to land partnerships with big companies like Microsoft (NASDAQ:MSFT), and Baker Hughes (NYSE:BKR).

Siebel, c3.ai’s CEO, said that the new US administration is looking to spend $2 trillion to  combat climate change. C3.ai is a leader in this space and has products like C3 Energy Management that are well-suited for companies in the energy and climate-sustainability markets.

Siebel is confident that the company’s brand building, combined with its strong human capital resources, will enable it to gain more customers. It is hiring former Deputy Director of the NSA, Rick Ledgett, and the UK’s former Home Secretary and Chancellor of the Exchequer, Sajid Javid. These additions should enable the company to get more deals from governments.

Valuation

Analyst’s average price target on AI stock is $136. My model (please see below) assumes a generous sales multiple of nine times but still generates  a fair value for the shares of around $62. That’s slightly below the current stock price.

Metrics Range Conclusion
Discount Rate 8.0% – 7.0% 7.50%
Terminal Revenue Multiple 8.0x – 1.0x 9.0x
Fair Value $55 – $68 $61.56

Model courtesy of finbox

The Bottom Line on AI Stock

The markets remain frothy, inviting speculators to chase  software stocks that have fallen. AI stock , which recently joined the New York Stock Exchange, does not have a long trading history. The stock is cheap relative to its initial price following its IPO.

Investors who only invest in profitable companies will need to wait for more than a year before buying AI stock,  which will be prone to volatility until the  company enters the black.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.