C3.ai, once a beacon of excitement in the enterprise AI software sector, now finds itself navigating a challenging landscape, trading nearly 40% below its initial public offering (IPO) price since its debut just over four years ago. While the company initially drew investors with its innovative technology and rapid growth rates, recent months have highlighted significant hurdles, including mounting losses and concerns about revenue concentration among a limited client base. However, analysts are predicting a potential turnaround, fueled by renewed growth in revenue and the extension of crucial contracts, notably with its largest client, Baker Hughes.
In fiscal years 2024 and 2025, which concluded in April, C3.ai showed encouraging signs, with its top-line growth accelerating once again. The company confirmed the renewal of its pivotal agreement with Baker Hughes, which currently represents over 30% of C3.ai’s total revenues, securing this relationship for an additional three years. The company has also made strides in expanding its federal contracts, enhancing cloud partnerships, and introducing new generative AI tools. Notably, it has begun to diversify its revenue model by transitioning to a consumption-based pricing strategy, diverging from its traditional subscription model.
Despite these positive developments, C3.ai’s valuation remains a point of concern. With its current trading levels at 7.5 times anticipated sales, many investors are left questioning whether the stock represents a sound investment. As it stands, the company does not project profitability in the near future, which is attributed to increased investments in AI services that are expected to generate growth but also incur significant costs.
Looking ahead, analysts have set ambitious expectations for C3.ai, estimating a compound annual growth rate (CAGR) of approximately 19% from fiscal 2025 to fiscal 2027. However, if these projections hold true, and factoring in additional growth through fiscal 2028, the anticipated market cap could actually decline despite revenue increases. With C3.ai’s market value currently sitting at $3.5 billion, a future valuation based on a conservative five times forward sales could see its market capitalization drop to approximately $3.3 billion, a stark contrast to earlier hopes of a resurgence to pre-IPO pricing.
In contrast to the challenges faced by C3.ai, two other companies within the AI-focused technology sector are drawing attention for their potential to outpace C3.ai in growth and market valuation—Applied Digital and DigitalOcean.
Applied Digital is engaged in the construction of large-scale data centers, leasing these to notable cloud and AI enterprises such as Microsoft and Amazon. The company has benefited significantly from the AI boom and is in the process of pivoting toward becoming a real estate investment trust (REIT). This shift could provide favorable tax implications; however, it also mandates that the company pay out a substantial share of its taxable income as dividends. Currently, Applied Digital operates five data centers in North Dakota and has plans to expand into South Dakota and Iowa.
Recently, Applied Digital launched a first-party cloud infrastructure platform utilizing its in-house servers, a venture that achieved rapid growth but also put the company in competition with its major clients. As part of its transition to a REIT, there are indications that the company intends to divest its cloud computing segment, which has historically grown quickly and contributed significantly to its revenues. Analysts project a CAGR of 48% in revenue from fiscal 2024 to fiscal 2027, with expectations that net losses will narrow. However, the implications of the planned divestment could alter market perceptions, necessitating a reevaluation of growth expectations.
Currently, Applied Digital’s stock is valued at 13.5 times projected sales for fiscal 2025, a notably higher multiple compared to C3.ai. Its market capitalization stands at around $3 billion, but if the divestment unfolds effectively and capital is reinvested into developing more data centers to meet increasing AI demand, it could establish a stronger foothold in the market, positioning itself to potentially surpass C3.ai’s valuation.
DigitalOcean, on the other hand, operates a cloud infrastructure platform tailored for smaller clients needing limited computing power, which distinguishes it from larger enterprise solutions like Amazon Web Services and Microsoft Azure. The company has expanded through strategic acquisitions, including the purchase of Cloudways and, more recently, Paperspace, which has enhanced its capabilities to manage GPU-powered servers for complex AI workloads. With more than 600,000 customers, over 500 of whom generate substantial annual recurring revenue, DigitalOcean is locking in larger accounts, which is vital for sustained growth.
Like C3.ai, DigitalOcean’s stock is currently trading approximately 40% below its IPO price. However, the company stands apart for its profitability and a more predictable growth trajectory. Analysts forecast a CAGR of 14% in both revenue and earnings per share (EPS) from 2024 to 2027, benefiting from the broader expansion within the cloud and AI markets. With a market cap around $2.7 billion and a valuation of just 3.1 times projected sales, DigitalOcean has the potential for significant appreciation. If it achieves expected growth and commands a valuation of five times forward sales, its market capitalization could surge to approximately $6.6 billion by fiscal 2028.
These insights place Applied Digital and DigitalOcean as intriguing alternatives for investors exploring opportunities in the AI landscape, particularly in light of C3.ai’s recent struggles. While each of these companies possesses unique strengths and market positions, the potential for robust growth and increasing valuations warrants attention as the industry continues to evolve.
In the dynamic and rapidly advancing sphere of AI and cloud computing, investors may find that diversifying their portfolios to include emerging players like Applied Digital and DigitalOcean could yield more favorable outcomes than placing singular focus on companies like C3.ai that face significant operational challenges. This evolving narrative underscores the importance of continuous analysis in an ever-changing market environment, where adaptability and strategic positioning can serve crucial roles in driving future success amidst the complex interplay of technology, investment, and economic realities.