Enterprise

C3.ai’s initial IPO pricing guidance spotlights the public market’s tech appetite

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On the heels of news that DoorDash is targeting an initial IPO valuation up to $27 billion, C3.ai also dropped a new S-1 filing detailing a first-draft guess of what the richly valued company might be worth after its debut.

C3.ai posted an initial IPO price range of $31 to $34 per share, with the company anticipating a sale of 15.5 million shares at that price. The enterprise-focused artificial intelligence company is also selling $100 million of stock at its IPO price to Spring Creek Capital, and another $50 million to Microsoft at the same terms. And there are 2.325 million shares reserved for its underwriters as well.

The total tally of shares that C3.ai will have outstanding after its IPO bloc is sold, Spring Creek and Microsoft buy in, and its underwriters take up their option, is 99,216,958. At the extremes of its initial IPO price range, the company would be worth between $3.08 billion and $3.37 billion using that share count.

Those numbers decline by around $70 and $80 million, respectively, if the underwriters do not purchase their option.

So is the IPO a win for the company at those prices? And is it a win for all C3.ai investors? Amazingly enough, it feels like the answers are yes and no. Let’s explore why.

Slowing growth, rising valuation

If we just look at C3.ai’s revenue history in chunks, you can argue a growth story for the company; that it grew from $73.8 million in the the two quarters of 2019 ending July 31, to $81.8 million in revenue during the same portion of 2020. That’s growth of just under 11% on a year-over-year basis. Not great, but positive.

But between the three-month period ending January 31, 2020 and the three-month period ending October 31, 2020, C3.ai effectively did not grow at all. Indeed, the company’s revenue between those dates grew by under $100,000, from $41.283 million to $41.341 million. And both were surpassed by the April 30, 2020 quarter, which managed $41.618 million.

Perhaps worse, in both the July 31, 2020 quarter and October 31, 2020 quarter, C3.ai was smaller than it was in a recently preceding period. That’s wild.

After digging through the company’s results and coming away slightly perplexed, I was stoked to see how its IPO might price. After all, how do you value an unprofitable tech company that has hit a revenue plateau? I had no idea.

The answer for C3.ai, off a trailing twelve months’ revenue of $164.7 million or an annualized run-rate of $165.4 million in its most recent quarter, is between $3.08 billion and $3.37 billion. That works out to a multiple of 18.6x at the extreme low to 20.5x on the extreme high.

Those are generous multiples for SaaS historically, and even today to some degree. So, C3.ai has convinced investors that its recent growth issues are temporary and that it will return to top-line expansion in short order. Or more simply: Investors are willing to take a more bullish than bearish angle on C3.ai’s future. That implies a super-warm and risk-on IPO market, which is music to startup, founder and venture capital ears.

So, is all happy and good for the company and its investors? No, as it turns out.

Sure, the pricing numbers look good given C3.ai’s recent struggles, but per PitchBook, the company was worth $3.30 billion after its most recent $50 million investment that it took last September. That investor may just break even on their check at C3.ai’s IPO price. (The company is about to raise a huge stack of cash to invest in itself heavily and find new growth, so that investor may still make out alright if they hold for a minute.)

With the C3.ai pricing we’re stuck between two takes, one positive and one negative. The multiples that the unicorn is set to receive feel bullish, while compared to the company’s last private valuation its price range is lackluster.

But I suppose you could argue that today unprofitable unicorns can go public with super-flat recent growth and still defend a multibillion dollar valuation. And that’s proper bullish.

DoorDash aims to add $11 billion to its valuation during public offering

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