C3.ai (ticker: AI ) has a catchy brand and ticker symbol, but it has a clear habit of rebranding to fit the hottest trends. It was still called C3 Energy in 2012, when investors favored gas and oil companies, but changed its name to C3 IoT in 2016 when the market fell in love with IoT devices. As a result, it changed its name to C3.ai in 2019, coinciding with the market’s growing interest in artificial intelligence, which attracted some attention.
Founder and company mission
C3.ai is a company founded by Tomas Siebel, the founder of Siebel (acquired by Oracle, ticker: ORCL). The main business of the company is to claim that as long as the software of C3.ai is used, it can help customers to make the existing software system artificial intelligence. C3.ai provides a platform that allows businesses to build AI applications in an efficient and cost-effective manner.
What does C3.ai do?
The company provides enterprise-grade artificial intelligence software using a SaaS consumption model. Essentially, the company has a comprehensive
A platform that includes application development tools and a runtime environment. This is a great boon for many businesses that need to integrate AI into their processes for businesses that simply lack the technical resources to build their own AI-integrated applications.
Additionally, C3.ai offers a full suite of applications addressing specific vertical industries. C3.ai describes this tool as Ex-Machina. In simple terms, this solution does not require writing codes and does not require a background in data science engineering. It can quickly access data and perform data analysis.
Products and solutions
C3.ai has enterprise artificial intelligence solutions including plug-and-play energy management, inventory optimization and anti-money laundering programs. These programs can fit into different business software suites, such as customer relationship management (CRM) or enterprise resource planning (ERP), and help their customers become more efficient. Products help users quickly analyze data, identify trends, and aid in decision making.
Although C3.ai has products for multiple industries, they are surprisingly concentrated in one industry: oil and gas. In the third quarter of fiscal 2023, which ended Jan. 31, 72% of bookings came from the sector, with the second-biggest contributor coming from the federal, aerospace and defense sector at 16%. That concentration comes from its relationship with Baker Hughes (BKR), the oilfield services company owned by General Electric. But it could also be seen as a risk if its biggest customer, Baker Hughes, ends the partnership.
In December 2020, the first day of C3.ai’s initial public offering (IPO) rose sharply, opening at 42 yuan per share.
The stock rose from 11.19 in late 2022 to 30.92 in early March 2023, surging more than 150% in less than two months.
Why C3.ai become a popular stock recently?
Catch up on the current hottest fields
C3.ai develops artificial intelligence algorithms that can be integrated into an organization’s existing software to automate tasks, improve employee safety, and detect fraud and crime. These fields were originally a headache for most companies, and they are currently the hottest technology fields.
Not only that, but it recently launched new dedicated tools for ChatGPT and other generative AI platforms. Growing interest in generative artificial intelligence has caused C3.ai’s stock price to more than double in the first quarter of 2023. But most investors forget that such a share price is still well below its December 2020 initial public offering price of $42.
About ChatGPT, and generative artificial intelligence; please be sure to refer to the in-depth explanation of another post I published a few days ago “OpenAI, the Generative Artificial Intelligence rising star and ChatGPT“.
C3.ai has great potential
But it is undeniable that C3.ai is full of potential. The company’s current market cap is just $2.4 billion, but it has created a whole new industry called enterprise artificial intelligence. It sells AI applications and solutions to businesses, whether they need off-the-shelf software or a fully custom solution for the business; C3.ai can theoretically deliver.
Potential AI market size
AI market is too amazing
C3.ai CEO Tom Siebel estimates that the market for AI (Artificial intelligence) applications will reach $600 billion because everyone will eventually use enterprise AI.
But the figure estimated by Tom Siebel is far lower than the forecast figure of Ark Investment Management founder Cathie Wood. In Kathleen’s “Big Ideas 2023” report, Kathleen believes that by 2030, artificial intelligence will add $200 trillion to the economy.
C3.ai has the first-mover advantage
Generative AI will increase the efficiency of professionals, AI stocks have a first-mover advantage, and C3.ai already has a first-mover advantage.
ChatGPT drives related stocks soar
It’s all about ChatGPT
In late 2022, users successfully started using OpenAI’s artificial intelligence application ChatGPT to automatically generate answers, texts, emails, and even books.
The ChatGPT app reached 100 million monthly active users within two months of going public, beating out popular apps like Douyin and Instagram. OpenAI has completed integration with Microsoft (ticker: MSFT) products, allowing ChatGPT to use natural language to help users write emails, develop code and find answers to everyday questions.
C3.ai benefits from the ChatGPT
C3.ai provides enterprise artificial intelligence, which includes applications for businesses rather than consumers. But the company will benefit from consumer apps like ChatGPT because the code can be integrated into the C3.ai platform.
C3.ai makes AI-enabled software applications that can be configured for different purposes. The software can make networks more reliable, detect fraud, balance inventory and demand, troubleshoot supply chain issues, improve energy efficiency, help with anti-money laundering, and chat with customers, among other popular features. Moreover, C3.ai products are also an important supplement to enterprise CRM systems, which can provide automation of related processes, thereby reducing costs and errors caused by human operations.
Share price surprise
With the public release of ChatGPT at the end of 2022, artificial intelligence has become the hottest topic on Wall Street, and the stocks of companies related to artificial intelligence have soared. In the first quarter of 2023, the stock price of C3.ai has nearly tripled.
C3.ai has become a bellwether among artificial intelligence stocks largely because there aren’t many pure options in the space.
With all the enthusiasm surrounding C3.ai and artificial intelligence, some investors may be asking fund managers if there are related stocks in their fund portfolios to invest in? If not, ask them why they didn’t choose C3.ai? If a fund reports C3.ai as a holding by the end of the first quarter of 2023, it also makes it appear at first glance that the fund has benefited from the stock’s strong gains during that period. You can get a lot of new customers, even if you don’t actually have one.
The selling point of its products
The AI software developed by C3.ai is widely used in manufacturing, government, financial services, oil and gas development, and defense companies. C3.ai is currently touting the ability of its generative artificial intelligence technology to integrate with OpenAI and Google’s AI technology.
Analysts have also been bullish on C3.ai, which cited “significantly improved” market sentiment alongside its earnings report in early March, citing the potential for C3.ai’s generative artificial intelligence products to increase enterprise use of artificial intelligence.
C3.ai’s new generative AI offering will drive accelerated growth in enterprise adoption of AI technology by the end of the year. C3.ai has been cultivating AI-based relationships with enterprise clients for years, and Wall Street believes generative AI will be the killer app for monetizing those relationships.
Customer is its biggest weakness
Customer growth is slow
Although C3.ai has been in business since 2009, it has only 236 customers so far, suggesting a long and slow sales cycle.
Major customer contracts will expire
Although C3.ai has expanded its partnership with Amazon’s (US stock code: AMZN) Amazon Web Services in multiple industries, the most important of which is to include local governments in the United States.
However, C3.ai’s partnership with Baker Hughes is also set to expire in fiscal 2025, and there’s no guarantee the parties will renew the partnership.
Top 3 customers account for half of the revenue
Its revenue is highly concentrated in three customers, Shell (ticker: SHEL), Duke Energy (ticker: DUK ), and Baker Hughes, so it is extremely risky.
Furthermore, three separate clients account for more than half of C3.ai’s fiscal year 2022 (ending April 30, 2022) revenue, so it does have serious concentration risk. But it also opens up another possibility: What if C3.ai could attract hundreds of these customers? Clearly, some companies find its product so valuable that they are willing to spend significant resources deploying C3.ai’s product.
Trying to diversify revenue streams
One of its most recent wins was the Department of Defense’s $500 million contract for the U.S. Missile Defense Agency, which is expected to last five years. As more customers make a public commitment to C3.ai, and as C3.ai’s products are used more and more across industries, it will help diversify away from a handful of customers.
However, C3.ai’s financials don’t support this rosy outlook.
Partners and competitors
C3.ai has cooperative relations with Alphabet (tickers: GOOGL and GOOG), Microsoft, Accenture (ticker: ACN), Baker Hughes, etc.
C3.ai has signed some new AI partnerships with Alphabet’s GCP (Google Cloud), Microsoft’s Azure, and the U.S. military, but the details of those deals are unclear and haven’t boosted its revenue significantly . C3.ai’s decision to abruptly ditch its subscription-based model also suggests it won’t lock in large customers with recurring revenue.
It also works with major cloud computing platforms such as Microsoft Azure, Amazon Web Services and Alphabet’s GCP, through which it makes its services available to a wide range of users, helping C3.ai acquire new customers. Amazon Web Services (AWS), Microsoft Azure and Alphabet’s GCP — have partnered with C3.ai to integrate its artificial intelligence technology into their own services. the
For example, using C3.ai to build applications on AWS will be 26 times faster than on AWS alone, requiring 99% less code to write. It can also be said that C3.ai has achieved the productivity improvement that Ark Investment Management refers to.
If you want to buy some C3.ai stock because of the future of C3.ai, but because the risk is too high, it is recommended to invest in a smaller position size. C3.ai’s competitor Palantir (ticker: PLTR) seems to be a better choice now. He Fang also considered this Palantir before investing in C3.ai.
For an in-depth introduction to Palantir, please refer to another article I wrote previously: “What kind of company is Palantir?“
C3.ai’s operating status
Main revenue streams
When we peel back the layers of the onion, it’s clear that C3.ai hasn’t evolved much in the past decade. It still generates most of its revenue from the energy segment (why was mentioned in the company history section at the beginning of this article?), and relies on a joint venture with oilfield services giant Baker Hughes for more than 30% of its revenue.
C3.ai’s algorithm does claim that it can be customized for different customers according to the needs of customers, so as to simplify and automate the process of specific industries. But critics claim they don’t really reach the level of “transformative” AI tools that C3.ai itself advocates.
Still at a loss
C3.ai’s revenue for the quarter ended January 2023 was $66.4 million, down 4% from $69.8 million a year earlier, but above the company’s guidance of $63 million to $65 million for the quarter. C3.ai also posted a net loss of 6 cents per share, slightly better than a loss of 7 cents per share a year ago.
Subscription model to consumption-based model
C3.ai’s products are becoming more and more popular in the market. The company closed 27 deals in the third quarter of fiscal 2023, up from 20 in the same period last year. C3.ai should be able to maintain its strong deal growth momentum due to the change in business model.
The company is transitioning from a subscription-based model to a consumption-based model. This could help C3.ai attract more customers, because potential users don’t have to sign long-term subscription agreements, but only pay when they use the company’s products. The company believes it can scale its consumption-based business model faster than its subscription business within eight quarters of starting the transition.
Business model changes lead to shrinking revenue
In the third quarter, revenue fell to $66.7 million from $69.8 million a year earlier. While this should raise red flags for every growth investor, it does come with a caveat. C3.ai is transforming its business from a subscription model to a consumption model where customers only pay when they use the product.
As a result, revenue was lower because existing customers were not taking full advantage of the product to offset higher subscription prices. Management believes this shift will lead to greater use of the company’s products by customers. However, there are risks as customers may reduce usage during a downturn. the
Still, the shift will be worth watching over the next year to see if it starts to have a positive financial impact.
C3.ai is a very young company that is losing money, but that shouldn’t surprise investors. The company is trying to capture a potentially large future market and is willing to sacrifice near-term profitability for long-term market share.
C3.ai’s poor track record of meeting its own guidance also suggests it won’t be growing annual revenue by 30% anytime soon. Analysts expect its revenue to grow at a compound annual growth rate of just 15% from 2022 to 2025, and it will remain unprofitable under generally accepted accounting principles (GAAP) through 2025. Those dismal estimates suggest that C3.ai should be trading at a much lower valuation — and that its recent rally has only been fueled by a speculative frenzy in AI-related stocks.
Growth slowed down significantly
C3.ai’s own growth rate since its IPO arguably paints a picture of an average enterprise software company heavily exposed to macroeconomic headwinds. Its revenue rose 17% in fiscal 2021, which ended in April 2021, before rising 38% in fiscal 2022 as the economy slowed, as the coronavirus pandemic disrupted growth in the energy sector.
At the end of fiscal 2022, C3.ai told investors that it could achieve 22% to 25% revenue growth in fiscal 2023. But by the end of the third quarter, it had lowered that growth forecast to just 4%-5%. The slowdown was driven by subdued corporate spending amid a difficult macro environment and its decision to switch from subscriptions to usage-based fees.
Management is optimistic
Chief Executive Thomas Siebel said overall business sentiment appears to be improving compared with mid-2022, and he thinks the company will be profitable in fiscal 2024. The company disclosed that it still has US$789.8 million in cash on hand, which can enable it to survive the turbulent stock market and the cold winter of the boom, and help the company make innovative investments related to enterprise artificial intelligence and expand its sales force to increase future revenue.
Does C3.ai have enough cash?
When C3.ai last reported its balance sheet in January 2023, it had zero debt and $772 million in cash. Last year, the company burned through $218 million. That means it will burn for roughly another 3.5 years as of January 2023. This cash reserve gives the company the time and space it needs to grow its business.
How is C3.ai doing?
It’s worth noting that C3.ai has actually increased its cash burn by 102% in the last year very hard and fast, indicating a heavy investment in the business. This really makes investors have to think carefully, because investors can’t take too much comfort in only 15% revenue growth in the same time period. With these two metrics in mind, investors are worried about the company’s development.
Can C3.ai easily raise more cash?
While it looks like C3.ai’s business is doing well, we still wanted to consider how easy it would be to raise additional capital to accelerate growth. Companies can raise capital through debt or equity. One of the main advantages of public companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company’s cash burn relative to its market capitalization, we can get an idea of how much shareholder dilution will occur if the company needs to raise enough cash to cover the next year’s cash burn.
With a market cap of $2.4 billion, C3.ai’s $218 million cash burn equates to around 9.0% of its market cap. That’s a low percentage so the company can raise more cash to fund growth, dilute it a bit, or even simply borrow some money.
How dangerous is C3.ai’s cash burning?
While its rising cash burn has us a little nervous, C3.ai’s cash burn is relatively free of immediate crises. Based on the factors mentioned in this article, we think its cash burn is worthy of shareholders’ attention, but we don’t think it should be too much to worry about.
Amazing share price increase
From 2023 to the end of March, the stock price rose by more than 203.25%, and it rose by 21.5% on March 31 alone. The main reason is to hitch a ride on generative artificial intelligence from the start of the year in 2023. Another reason is that C3.ai is one of the few companies listed on the US stock market that directly uses artificial intelligence as the company’s only business.
As long as investors who invest in US stocks, especially those who pay attention to the dynamics of technology stocks, it is impossible not to notice this company.
Stock performance out of step with fundamentals
In its recently released third-quarter fiscal 2023 report, the company actually reported a decline in revenue and doesn’t appear to be close to being profitable. While management has touted increased interest in its products and announced a new suite of generative artificial intelligence products in recent months, those positives appear to be reflected now that the stock has nearly tripled in the past three months. in the price.
With the recent surge largely empty, it’s hard not to think the stock is overvalued as it trades at 13 revenue and revenue is headed in the wrong direction.
Mania for investing in artificial intelligence
This kind of stock price increase only reveals one thing: market investors are extremely optimistic about the future of artificial intelligence, which has caused all funds to flock to it, almost because they are afraid of missing this artificial intelligence train to get rich. But whether the collective wisdom of the masses is correct, and whether the market’s valuation of the stock has deviated from the fundamentals, I believe that experienced stock market investors will have the answer in their hearts.
Several major risks
Investors should think twice
C3.ai benefits from the recent focus on artificial intelligence. Shares are up 80% in the past three months, but is the hype justified?
C3.ai is a young company and has a lot of work to do to become a sustainable business. Investors should understand the long road ahead before chasing stocks for their portfolios, especially after the recent rally. Here are a few red flags investors must know before buying.
That doesn’t mean companies won’t benefit from the rise of AI, but the market is still in its infancy, and it’s unclear how some companies will benefit and what potential government oversight of AI might be in the future.
Business model is complicated
C3.ai builds software tools and turnkey solution applications for businesses. The company focuses on the field of artificial intelligence, including being recognized as a leader in the Forrester Wave for artificial intelligence and machine learning platforms. For example, its software can use machine learning to detect money laundering. In oil and gas, C3.ai’s software monitors the moving parts of the supply chain to keep operations running efficiently. But how do investors measure the value that C3.ai brings to the enterprise?
At first glance, revenue growth doesn’t tell a good story. Sales for the company’s third quarter of fiscal 2023 (ended Jan. 31) were down 4% year over year. Full-year revenue guidance of $265 million represents growth of just 5%. Management attributed the slow growth to a shift to a usage-based billing model, which should accelerate over time as businesses use the software more. However, this is a double-edged sword. It can make the business more volatile, which thrives in good times and suffers sharply when customers tighten their wallets.
Investors shouldn’t rush to put their faith in the company. Its largest customer, Baker Hughes, still accounts for about 30% of revenue. Not only does this create concentration risk (Baker Hughes’ contract expires in 2025), but without a more established portfolio of businesses, it’s fair to question how attractive C3.ai’s offering is. Currently, the company only has 236 customers.
This reminds me of Peter Lynch has spoken of the simplicity of investing, saying, “If you can’t explain to a 10-year-old in two minutes or less why you own a stock, you shouldn’t own it.”
When will C3.ai’s business make money?
Many growth companies lose money — and that’s normal. But ideally, you’ll see a clear path to profitability. C3.ai has laid the groundwork for a positive operating margin by the end of fiscal 2024 (end April 2024). Management expects operating margins to recover strongly after troughing at -36% six months ago. This is due to the expected ramp-up phase of its usage-based billing model.
But a positive operating margin doesn’t necessarily mean the company is profitable. Below you can see how businesses burn more cash than they generate. Spending surged in three quarters of fiscal 2023, led by research and development, up 54% year-to-date to $161,000.
C3.ai’s operating margin could turn positive, but investors may have to wait longer to see positive free cash flow. Fortunately, the company does have some time. With roughly $790 million in liquid assets like cash and short-term investments, that’s enough to fund nearly three years of operations at the rate C3.ai has burned cash over the past four quarters.
Still, a company with a multi-year path to making money remains a huge question mark. It’s hard to wait for answers when the economic environment is as volatile as it is now. What if we enter a recession and companies bill based on usage the other way around? In this case, the loss of cash could worsen.
C3.ai pays employees too much ctock compensation
Companies’ aggressive use of stock-based compensation is one of the big reasons why investors should worry about the aforementioned financials. Paying employees with stock is a common way for growing businesses to conserve cash. But excessive stock compensation can dilute existing shares to the detriment of shareholders. The company paid a staggering $204 million in stock-based compensation over the past year, or 76% of revenue.
In other words, if companies paid their employees full wages, the cash loss would be far worse than it is now. In my opinion, it undermines the financials as management is passing this cost on to investors.
C3.ai looks like a company working on its sales strategy, spending a lot of money, and diluting investors with a lot of new shares — all at the same time. These things are of little benefit to shareholders. Before C3.ai comes up with better numbers than today, please consider this one.
C3.ai has great AI solutions, but its financials aren’t great. There is no doubt that C3.ai was one of the best-performing stocks in the first quarter of this year, but such a stock performance is almost entirely driven by market speculation, and investors must be careful.
- “The artificial intelligence bubble in the capital market is forming“
- “How does the all-powerful Huawei make money?“
- “Artificial intelligence investment trap“
- “Major artificial intelligence companies in US stocks market“
- “OpenAI, the Generative Artificial Intelligence rising star and ChatGPT“
- “Data center, a rapidly growing semiconductor field“
- “Consider Alphabet if you can buy one stock only to retire from it? “
- “How Microsoft makes money? What’s the next?“
- “How does nVidia make money? nVidia is changing the gaming rules“
- “Revisiting Nvidia: The Absolute Leader in Artificial Intelligence, Data Center, and Graphics“
- “How Adobe makes money? irreplaceable undocumented standard“
- “Artificial intelligence online lending platform Upstart“
- “Deep Dive The Trade Desk“
- “C3.ai, a position successfully artificial intelligence company“
- “What kind of company is Palantir?“
- “Fair Isaac, one of the most important listed companies in the US consumer finance industry“
- “Intuit, the leader in financial management software for individuals and SMEs“
- “How does Tesla make money?“
- “How AMD makes money? A rare case of turning defeat into victory“
- “Why is AMD’s performance so jaw-dropping?“
- “How does Intel make money? and the benefits to invest in it“
- The content of this site is the author’s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.
- I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers’ direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.