The development of an AI ecosystem could provide significant value for companies looking to reimagine themselves in the future.
iLearningEngines, Inc. (NASDAQ:AILE) came across our desk as a fast-growing artificial intelligence-derived company for corporate & educational use with plenty of potential. The company’s mission is to revolutionize how companies approach learning, information intelligence & work automation at scale. If this can be achieved, one is looking at developing a preeminent AI ecosystem that could add serious value concerning how companies reimagine themselves going forward. Furthermore, the fact that the software can drive internal mission-critical outcomes is a major selling point and one that will not go unnoticed by companies & investors alike.
Management compares the boom in AI-derived software services to the initial stages of the SAAS boom of yesteryear. We believe there is truth in this premise. It is a telling comparison, as companies know they have to improve everything in-house at breakneck speeds just to remain competitive. This is where sophisticated AI-driven platforms come into play, where the very best technology is set to attract interest from paying companies on mass.
The potential of the company has been evident in recent months, particularly from the standpoint when iLearningEngines became a public company back in April (through the business combination with Arrowroot Acquisition Corp). Encouragingly, additional funding from East West Bank quickly followed the completed business combination. Then an impressive set of first-quarter numbers followed by multiple AI-driven partnerships finally turned the share price up earlier this month resulting in the stock currently trading at approximately $8.70 a share.
In stating the above, investing in growth stocks such as AILE is all about being on the right side of the trend. As we see below on the technical chart, although shares have had an excellent June thus far, there has been little movement in the popular ADX trend-following technical indicator. Suffice it to say, a breakout above overhead resistance & and an upturn in the ADX reading (preferably above 25) would present an excellent technical setup to potentially start putting capital to work in AILE on the long side. The strength of iLearningEngines’ fundamentals is in plain sight as we learn below with the company’s growth of its Annual Recurring Revenue (“ARR”) being the cornerstone of how prospective investors will view this play.
In iLearningEngines’ first quarter, 33% revenue growth ($125 million) resulted in Annual Recurring Revenue growth of 34% ($479 million). Licensed users grew by approximately 300k to reach 4.7 million users in the quarter. Furthermore, gross profit & adjusted EBITDA expanded and the company’s net GAAP loss of $25.9 million would have actually been in positive territory but for temporary changes in fair values of both warrants & convertible notes.
Therefore, not only is the company literally profitable from a bottom-line GAAP standpoint but every uptick in revenue is also going to favorably increase that key ARR metric. Moreover, any uptick in top-line growth, should over time benefit bottom-line earnings growth & the share price accordingly, which is what the market invariably wants to see. The CEO stated the following concerning iLearningEngines’ bullish trends in the first quarter.
The first quarter was a strong start to 2024,” said Harish Chidambaran, Chief Executive Officer of iLearningEngines. “We achieved 33% revenue growth year-over-year and grew annual recurring revenue1 by 34% year-over-year to $479 million. With our business combination with Arrowroot Acquisition Corp. and related financing now complete, we believe we are well positioned to invest in continued platform growth, helping more and more customers harness AI to improve their business outcomes
Consensus expects the company to grow its sales by strong double-digit percentages over the next two to three years. Furthermore, forward-looking sales revisions have been positive over the past 30 days, demonstrating underlying strength in AILE & its value proposition. This should not be surprising when we see the multiple verticals (similar to the SAAS boom) that iLearningEngines’ verticals can be used across. To this point, although education, healthcare, insurance, & corporate upskilling may be the most obvious destinations for iLearningEngines’ software, iLearningEngines’ vertical coverage continues to grow. Meaningful value can be also added to the likes of automobile & retail verticals, etc concerning learnings & automation initiatives.
Gross profit margin surpassed 69% in the first quarter, which means the trailing comparable comes in at approximately 69.15%. As we witnessed recently in the SAAS boom when functionality was swiftly migrated to the cloud, tech stocks quickly jumped on the huge spending tailwind to take advantage of the significantly increased spending by companies in this area.
Well, iLearningEngines is starting well ahead of the eightball here concerning its profitability, as the sector median at present comes in at 49.43%. Why is this important? Well, if inflation were to rise from its present level (putting pressure on costs over time), AI software companies with stronger gross margins would be able to compensate for these costs all things remaining equal. This is important because a profitable iLearningEngines (as opposed to unprofitable competitors) would continue to have the wherewithal to invest in its AI ecosystem, thus potentially widening the gap between itself and the competition.
To sum up, we like what we see in iLearningEngines, especially concerning the growth in its ‘Annual Recurring Revenue’ and the vast number of verticals the company’s software can serve. As long as there are no macro surprises over the near term (such as a strong recession or a spike in inflation, etc), current trends demonstrate growth for iLearningEngines. Remember, the risk here is that forward-looking growth rates disappoint the market, which is why we await technical confirmation where two to three weeks of more gains (higher highs) should push the needle forward. We look forward to continued coverage.
