C3.ai stock is riding the AI wave. However, not everyone is happy with its performance. Spruce Point Capital Management founder and CIO and short seller Ben Axle sent an open letter to one of the company’s board members questioning the company’s business. Axeller explained his concerns to Sheena Smith and Ally Garfinkel of Yahoo Finance Live.
video transcript
Sheena Smith: C3.ai’s stock has surged more than 200% this year on investor excitement over AI. But the company has again been targeted for short-selling Spruce Point Capital Management recently issued an open letter to C3.ai director Richard Levin, questioning C3.ai’s business and C3.ai CEO Tom Siebel’s response to short sellers, citing “unprofessional conduct.”
We would like to bring Ben Ackler, Chief Investment Officer and Founder of Spruce Point Capital Management, and Ally Garfinkel of Yahoo Finance into the conversation. Ben, I’m so glad you came to the studio. Well, I see that you’ve been following C3.ai for quite some time, 16 months, exactly 16 months. You have questioned some of their business practices in the past. You question the very fact that they tend to follow trends. What is his biggest problem or biggest concern with C3.ai right now?
Ben Ackler: I think you’ve overstated your claims about the total market you can serve, how much money you’ve invested in real AI technology, and how many times you’ve retargeted your customers. And if you’re reviewing your customers, how can you be confident about your bottom line?
So it’s not just one. We think it’s a hugely exaggerated business with a lot of things coming together to make big claims.
Sheena Smith: And you said after the company won both in sales and bottom line last week. Yes, that guidance did not meet Street’s expectations. I am a little disappointed. But Siebel expects to be profitable in fiscal 2024, she reiterated. Isn’t that enough, or are you unwilling to buy?
Ben Ackler: Well, he’s made a lot of promises in the past, but I think they’ve been postponed many times in the future. So instead of seeing just a quarter of cash flow, he also wants to see evidence of multiple sustained cash flows. We also believe that the guidance you pointed out, which slightly outperformed our pre-announced expectations, was just 10% for earnings growth and 15% for him on the lower end. So for us, AI is growing expansively and doesn’t necessarily justify the 9 and 1/2, almost 10x earnings multiples that the market has assigned to stocks.
Ally Garfinkel: Hello, I’m Ally. Ben, you know, I’d like to take a methodical look at some of these points. Because, as you know, investors are very excited about his C3.ai. Therefore, I would like to clarify where your concerns lie. One of them, as you know, is again the cash burn issue. So I’d love to know, a lot of tech companies aren’t profitable. Why am I particularly concerned about cash burn? Is it a product issue? Not enough history? Where does it start and where does it end?
Ben Ackler: Well, I think the company has just run out of close to $150 million or $200 million in cash since we first explained our concerns about the company. There was one quarter in which cash flow was positive, but one data point does not form a trend. We want to see sustained cash flow. But it’s also a dilution of that, right? I mean, watch the number of shares continue to grow. If you look at the operating cash flow and subtract the actual non-cash stock, I think the cash flow is negative.
Therefore, this company relies heavily on issuing shares to its employees. And if the public and employees don’t agree with the stock’s value proposition, they’ll have to pay their employees more cash to recruit and retain them. So this company is very fragile and sensitive to keeping the value of its shares as-is.
Ally Garfinkel: To that end, I would like to move on to one of the other concerns you outlined in your report. Yes, I spent the weekend looking at your report. CFO revolving door, many companies move through his CFO. Why are you particularly concerned about C3.ai’s move through your CFO over the past 17-18 months?
Ben Ackler: Well, I think the facts speak for themselves. So, I think one of her CFOs resigned right after or just before going public, right around the time, which was a bit unusual. And they brought in an individual we pointed out to be associated with another company with a financial restatement and a bit of a troubled past. He resigned immediately after our first report. And now they have yet another CFO.
So, as you know, we want to see some stability and get the CFO’s buy-in. He also points out that several directors have sold shares since this, just as the current CFO recently sold shares. I won’t quote you, but in a “pre-announcement” they’ve reviewed our claims and said all is well, yet insiders continue to sell stock. sell. And Baker Hughes, the company’s largest strategic investor, recently sold as well, after a hiatus dating back to 2021.
So the last point I would like to finally raise is that they haven’t exercised any buybacks recently, even though they have a buyback program. Nonetheless, they claim the stock is undervalued. I mean, we want to see evidence that his CFO position is stable. I hope you stop insider selling. And if they believe in the future, why not buy back their shares?
Sheena Smith: Ben, considering the fact that the CFO position was a revolving door, are you arguing that there was fraud somewhere within the business?
Ben Ackler: No, I’m not advocating that. It’s beyond my means. But I certainly argue that I believe there is a lot of arrogance going on here. Again, I think there’s a lot of exaggeration about TAM (The Addressable Market), the amount invested, and ultimately the business prospects.
Ally Garfinkel: And Ben, I also want to ask, if we’re not claiming fraud, what do you want to know? What is your message for Tom Siebel?
Ben Ackler: I think the message is to convey it straight to the customer. So you see multiple revisions going on for the customer they claim to be. Well, let’s rewind to two weeks ago. They reviewed the short sale allegations and released a statement that there were no inaccuracies. And they didn’t expect anything to come out of it.
And this quarter, deep in the sidebar, we’ve added three slides explaining how we define customer engagement, and we’ve also rewritten the customer. So you need to understand what a customer is and why they claim that measuring a customer is so complicated. And if you can’t earn the trust of your customers, you can’t earn the confidence of your bottom line.
Ally Garfinkel: And you know, you’re ringing the alarm bells. You have been arguing this point for 16 months. But Wall Street doesn’t seem to care. So I think the last question I have is where is the disconnection? Is it just the ticker name that people are excited about?
Ben Ackler: Well, I think so. So that means there’s a lot to do with retail here. But where have the large institutional growth technology investors gone? As you know, I don’t see stability in my relationship with Baker Hughes. And their continued sales are clearly a point of concern, the insider sales already mentioned.
Again, I think there’s definitely a disconnect when it comes to where this company is going and how it’s rated. You don’t have to take my word for it. Look at the average consensus target price among brokers that covers it. The average target price will be around $25 or $26. So if you look at what the stock is doing now and what other experts say it’s worth, you’ll come to the same view as me that the stock is overvalued.
Sheena Smith: I’d also like to point out that I asked C3.ai for comment. They then pointed us to a response published on May 15, which upon investigation found that none of the allegations or innuendos of wrongdoing by Spruce Point or Kerrisdale were factually supported. said. They went on to say that they found no fraudulent misrepresentations or omissions in the company’s disclosures to date.
Tomorrow we’ll hear from Tom Siebel, CEO of C3.ai. But a big thank you to Ben Axler, founder of Spruce Point Capital Management, for taking the time to join us here.
Ben Ackler: Thank you for calling me.
Sheena Smith: And of course, thanks to Ally Garfinkel.
