Using the 2 Stage Free Cash Flow to Equity, C3.ai fair value estimate is US$21.92
With US$19.21 share price, C3.ai appears to be trading close to its estimated fair value
Analyst price target for AI is US$29.47, which is 34% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of C3.ai, Inc. (NYSE:AI) by taking the expected future cash flows and discounting them to today’s value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won’t be able to understand it, just read on! It’s actually much less complex than you’d imagine.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
We’ve discovered 2 warning signs about C3.ai. View them for free.
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
-US$35.5m
-US$20.2m
-US$33.3m
US$41.3m
US$69.8m
US$104.0m
US$140.6m
US$176.3m
US$209.2m
US$238.2m
Growth Rate Estimate Source
Analyst x7
Analyst x5
Analyst x5
Analyst x1
Est @ 68.92%
Est @ 49.07%
Est @ 35.17%
Est @ 25.45%
Est @ 18.64%
Est @ 13.87%
Present Value ($, Millions) Discounted @ 7.6%
-US$33.0
-US$17.4
-US$26.7
US$30.8
US$48.4
US$67.1
US$84.2
US$98.2
US$108
US$115
(“Est” = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$475m
Story Continues
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.8%) to estimate future growth. In the same way as with the 10-year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 7.6%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$5.1b÷ ( 1 + 7.6%)10= US$2.4b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$2.9b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$19.2, the company appears about fair value at a 12% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope – move a few degrees and end up in a different galaxy. Do keep this in mind.
NYSE:AI Discounted Cash Flow April 22nd 2025
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at C3.ai as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we’ve used 7.6%, which is based on a levered beta of 1.117. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
View our latest analysis for C3.ai
Strength
Weakness
Opportunity
Threat
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won’t be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you’d apply different cases and assumptions and see how they would impact the company’s valuation. For example, changes in the company’s cost of equity or the risk free rate can significantly impact the valuation. For C3.ai, there are three further elements you should assess:
Risks: Be aware that C3.ai is showing 2 warning signs in our investment analysis , and 1 of those is significant…
Future Earnings: How does AI’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
