Synthetic intelligence (AI) shares have grow to be more and more common in 2021, spurred by corporations like Lemonade (NYSE:LMND) or Zillow making integral use of AI of their enterprise. Whereas corporations have had various levels of success, it’s clear that AI shall be a powerhouse of the world a decade from now.
Many corporations have introduced AI to the world of insurance coverage, utilizing it as the first level of dedication for mortgage approval and person acceptance. Whereas many traders know Lemonade, there may be one firm that does not get talked about as a lot that got here public in August 2021. That inventory is CCC Clever Options (NYSE:CCCS). Does CCC deserve a spot in your watch listing? Let’s discover out.
The AI edge
CCC’s market relies on automotive insurance coverage and collision restore, and the corporate sells AI-based software program to insurance coverage corporations and restore corporations. With this software program, these two industries can entry elevated effectivity, as a result of CCC’s software program helps each industries all through the laborious, complicated means of getting drivers up and operating once more.
The corporate claims that its major aggressive benefit hinges on one issue: Its resolution is built-in and full, whereas different insurance coverage software program options are targeted on insurance-only processes. CCC, it claims, is the one main firm that’s integrating and enabling easy communication and workflow between insurance coverage and restore corporations.
This aggressive benefit has led to robust community results. If an insurance coverage firm just isn’t utilizing CCC software program, it may be a ache working and speaking with a restore firm. Nonetheless, if the restore firm is utilizing CCC, it turns into a straightforward alternative for that insurance coverage firm to work with that restore firm. The extra insurance coverage corporations depend on CCC, the extra restore retailers will need to be on CCC, and the cycle continues. This has led to spectacular penetration: CCC has over 300 insurers on our community and over 26,000 restore services.
Proper now, the corporate solely seems like a software-as-a-service inventory, so what’s the AI edge? The corporate processes $100 billion of transactions yearly, so CCC clearly has plenty of knowledge. On the insurance coverage facet, CCC sells AI options to insurers who can’t afford to construct out their inner AI group. With this AI resolution, CCC makes use of its huge knowledge trove to estimate claims and make selections quicker for insurance coverage suppliers.
For restore services, CCC’s AI is all the time operating, connecting restore services with insurance coverage corporations and estimating prices by searching present half costs and availability, all in real-time.
How a lot can it develop?
Now we’re beginning to see the variations between Lemonade and CCC (and in addition how broadly AI can be utilized within the insurance coverage business). Whereas Lemonade focuses on promoting insurance coverage to customers, CCC sells software program to companies — doubtlessly even Lemonade, although that firm is simply getting began within the auto insurance coverage market. One other key distinction is that CCC has a lot increased penetration in its market, whereas Lemonade’s development is taking off.
CCC has been round since 1980, and it now processes over 350 million transactions yearly. The corporate already has important penetration, with over 26,000 clients. Lastly, CCC is greater than only a U.S. story, with 4 out of the 5 greatest Chinese language automotive insurers as clients on the platform. For sure, there’s an opportunity that CCC has already totally penetrated its markets.
This massive quantity of penetration has led to very gradual development. In its third quarter, the corporate grew income by 12% from the year-ago quarter, which was even quicker than 2020, the place it grew income by lower than 3% in comparison with 2019. What is perhaps worse about that is that the corporate spent virtually $220 million — 185% of gross revenue — on stock-based compensation. This introduced the corporate’s web loss to $189 million.
Excluding stock-based compensation, the corporate would have been barely worthwhile, and the corporate’s free money circulate is powerful at $72 million thus far this yr. The corporate’s valuation is excessive however not the worst both. The corporate is guiding for $684 million in full-year 2021 income, and at a market cap of $7.8 billion, the corporate’s ahead valuation is 11 occasions gross sales. That is a lot decrease than corporations like Lemonade, which trades at almost triple that ratio.
So is CCC a purchase?
When an organization is fast-growing and has a big runway, I are inclined to put much less emphasis on valuation and profitability. Nonetheless, when an organization already has large penetration and it’s rising very slowly, I pay plenty of consideration to income. Contemplating that this firm is barely worthwhile after adjusting for stock-based compensation and it has been rising within the single digits, CCC may not be proper for development traders.
Nonetheless, there’s a very robust enterprise right here, with a agency basis. This firm has planted its roots internationally, and its immense community results clearly paid off through the years. CCC could also be proper for traders who need a steady, predictable firm of their portfolio that’s nonetheless utilizing progressive know-how.
This text represents the opinion of the author, who could disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one in every of our personal — helps us all suppose critically about investing and make selections that assist us grow to be smarter, happier, and richer.