NASDAQ:AIXI
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Initiating Coverage
We are initiating coverage of Xiao-I Corporation (NASDAQ:AIXI) with a valuation of $2.40. Xiao-I has operated on the edge of the artificial intelligence world through its legacy chatbot business for close to two decades and is leveraging that experience to expand into new product lines related to AI. The business has undergone a radical transformation over the past twelve months as a result of the company’s IPO on the NASDAQ in 2023, its shift to a cloud-based model and the introduction of the company’s first large language model (LLM).
The company launched Hua Zang large language model (LLM) in October 2023 joining at least 100 other LLMs announced in China in 2023. We expect competition in the LLM market to continue to intensify before the leading technology companies establish their dominance. Xiao-I’s success in providing industry specific solutions (like those for the financial services sector) gives it a leg up when competing head-to-head with China’s tech giants.
Xiao-I’s core competencies have been derived from its legacy customer service business where it has deployed the following technologies:
• Natural Language Processing enables customers to process human language with a combination of computer-based models. Since most of the company’s solutions enable computer-to-human communication, this is a critical component of the company’s services.
• Speech Processing enables the company to apply the same degree of human-to-computer interaction by converting speech into digital signals that can be processed. When you call a customer service number and say something like “speak to an agent”, speech processing enables that call to be connected to the proper channels.
• Computer Vision broadly refers to optical character recognition and construction blueprint analysis at Xiao-I. One of the company’s subsidiaries, Shanghai Xiao-I has a particular strength in analyzing and processing CAD drawings which has led to some large contracts in the past.
• Machine Learning including traditional machine learning, deep learning, reinforcement learning, and other tools. These machine learning tools are applied alongside the company’s NLP, speech processing and computer vision tools to offer a more complete solution in all of its target markets.
2024 Presents Opportunities and Challenges
The company has shifted to a cloud delivery model and we are predicting revenues of $56.6 million in 2023 growing to $70.1 million and $89.7 million in 2024 and 2025 respectively.
Despite this anticipated growth, the company is likely to require substantial additional resources as it continues to invest in new AI solutions and as it attempts to compete in the AI space where other public companies have significantly greater financial resources.
The company has a long operating history and is attempting to reposition itself in the market as an AI solutions provider which has been met with some skepticism by the market. The company has demonstrated some applications for its LLM that can be used in consumer products but we believe the current examples are just scratching the surface of the potential for these models going forward.
Valuation
Valuing Xiao-I is a difficult task at the moment because the booming market for anything related to AI is meeting reality of slowing Chinese economy. We believe we have been fairly conservative with our revenue model forecasting roughly $70 million in revenues for 2024 and $89.7 million for 2025. Valuations for Chinese tech companies have fallen sharply over the last five months with many companies in the space trading at or near 52 week lows despite the AI frenzy that has occurred in the US markets. Eventually, we expect some reversion to the mean in both markets but until that time we will use a more conservative valuation assumption for Xiao-I.
Applying a 3x revenue multiple to our 2025 revenue estimate of roughly $90 million gives us a valuation for the company of approximately $270 million. Given the early stage of development of Xiao-I’s new AI business lines, risks associated with operating in China, and recent board’s actions which have diluted ADS holders voting rights we believe the stock will trade at a substantial discount to this valuation, closer to $177 million or roughly $7.30/ ordinary share. However, since each ADS trading on the NASDAQ only represents one third of one ordinary share, our valuation target per ADS is – $7.30 divided by 3 or approximately $2.40 per ADS at the end of 2024.
If the company successfully expands its offerings and sees demand for new services scale faster than we have modeled, we believe our forecasts may prove conservative. Additionally, if the Chinese economy manages to avoid a severe contraction, valuations could improve dramatically for many AI-related companies including Xiao-I.
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