C3 AI (AI) has taken the public market by storm this year, posting a staggering 260% year-to-date gain. So you might think Wall Street would go crazy for an artificial intelligence company headed by the legendary Tom Siebel, best known for founding and selling the software company Siebel Systems.
not so soon
Despite its soaring stock price and prominent CEO and founder, tech analysts have concerns about the 14-year-old company, from how management counts its customers to hiring its CFO.
But I can also see why the company has so many fans. As the AI boom kicked off in 2022, C3’s stock price soared, pushing the company’s market cap past his $4 billion mark as bullish investors claimed the company was indeed the leader in enterprise AI. (After all, they have a valuable ticker called AI.)
In the fourth quarter of fiscal 2023, C3 earned $72.4 million, primarily from subscription revenue, with a GAAP net loss of $0.58 per share.
So who is right? Is C3 a nova or a supernova, or something in between? Yahoo Finance asked analysts and short sellers from both sides to compare their views.
bear incident
C3’s massive gains have some analysts and short-sellers wondering if the stock is uncontrollably overheating. The list of concerns includes concerns about the size of C3’s customer base, CFO turnover, and how the company’s revenue growth compares to its competitors.
“Subscription revenue has been roughly flat quarter to quarter for the last three to four quarters, and while profitability has improved rapidly, it is still wasting money,” said Kingsley Crane, senior analyst at Canaccord Genuity. “So when you look at revenue, growth and profitability, open market software companies are in the bottom quartile.”
He added, “As I’ve said before, I don’t think C3’s fundamentals will necessarily align with movements and prices. But that’s true for a lot of companies.”
The way C3 counts customers has changed over time, which is particularly troubling.
“Be honest with your clients,” Ben Axle, founder and chief investment officer of Spruce Point Capital Management, said in a June interview on Yahoo Finance Live. “We are currently reviewing multiple amendments for the customers they claim to be. [numbers]I am not confident in my earnings.
The filing, citing Ackler, which is shorting shares, includes a section stating that the company’s customer count includes “products and services, including paid trials, one-time, subscription, and professional service offerings.”
“There is a customer count and a customer entity, but the way those numbers are calculated has been modified and changed,” Canaccord’s Crane said. (See illustration above.)
“For example, if you’re doing business with Shell in three or four different divisions, you’re counting three or four customers and one customer company,” he said.
According to the latest tally, C3 has 287 customers.
The number of customers may indicate another problem. In other words, the business is not yet good enough. “If this company has a competitive product, why is customer numbers relatively flat?”
Additionally, C3 has seen a significant shift in the CFO position. Since 2019, C3 has four of his CFOs, which is a lot. Since 2019, fewer than 10% of U.S. public companies with a market capitalization of $1 billion or more have left their CFO positions, according to Bedrock AI data.
In fact, C3 has had nine CFOs in its 14-year history. It’s not entirely clear why there are so many sales, but Siebel told Yahoo Finance that it has to do with how C3 has evolved and grown.
“We started with three people,” said Siebel, who owns about 6% of C3. “We went to 10 employees.
bull incident
First, in case you haven’t noticed, C3 is in a hot market.
“C3 has built a business that should reach $300 million this year around applications in machine learning and predictive artificial intelligence,” said Gill Luria, senior software analyst at DA Davidson. “This makes the company one of the largest providers of enterprise AI and one of the first pure businesses in the space.”
For Siebel, the expected size of the AI market is key to C3’s growth potential.
“Generative AI alone is probably over $1.2 billion,” he said. “If you look at enterprise AI, even without generative AI, the forecast is $500 for him. [billion]$600 [billion], a notable market opportunity of $700 billion. So this is as big a market opportunity as I think we’ve seen so far. “
But what about your customers? Davidson’s Luria believes C3’s lagging customer numbers are due to long-term contracts and long sales cycles as an enterprise company.
Robert Siegel, a Stanford Graduate School of Business lecturer who conducted a case study for the company in 2018, suggests that C3’s customer base, which currently includes the U.S. Air Force, Raytheon (RTX) and Con Edison, may indeed be limited, but that’s not necessarily a bad thing.
“They seem to be most powerful with large, complex industrial customers who have very large datasets and are not digital natives,” Siegel said. “Will that limit their customer base? Maybe in terms of number of customers…but not necessarily in terms of the size of the opportunity.”
Constellation Research founder R “Ray” Wang added that there are other ways to see C3 growth.
“You can look at C3 growth in two ways: public sector growth and private sector growth,” he said. “Public sector growth is successful because it is taking market share from competitors like Palantir. Private sector growth is limited to forward-thinking companies that understand the value.”
“We have evolved over the past 14 years and our customer mix has changed tremendously…and we have continued to do our best to represent as accurately as possible the number of customers we offer or have in the market,” Siebel said of these customer accounting changes.
Conclusion
Regardless of what the bears say, C3’s stock is likely to relentlessly rise for the foreseeable future. How does it match the base?
Adrangi argues that we should look for rates closer to Palantir (PLTR) growth indicators. Numbers to consider: His Palantir revenue in 2022 climbed 24% year-over-year to reach $1.91 billion. C3’s revenue for the last fiscal year (2023, reported in May) was $266.8 million, up 5.6% from the previous year.
However, its growth is not yet fully developed. However, AI is in its early stages and C3 is leading the way. According to Tola Capital partner Aaron Fleishman, making these enterprise AI products work, despite all the hype we’re hearing, is extremely challenging and requires a lot of effort before the products are fully running and scalable.
So who is right, the bulls or the bears? If you had to choose which side to take, who would you go with? Ultimately, the decision would come down to how much you support the AI hype and Siebel’s massive track record.
At least for him, the chance is clear.
“I think investors who downplay the theory of AI in 2023 are like betting on the Internet in 1996,” Siebel told Yahoo Finance.
Ally Garfinkle Senior Tech Reporter at Yahoo Finance. follow her on her twitter @agarfinks and further LinkedIn.
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