When C3.ai (AI -0.61%) went public on December 9, 2020, it generated a lot of buzz for three reasons: it grew quickly, it was founded and led by tech veteran Tom Siebel (who sold his previous company, Siebel Systems, to Oracle), and it had a catchy ticker symbol. Those factors, along with the buying spree in growth and meme stocks, propelled C3.ai from its $42 IPO price to an all-time high of $177.47 less than two weeks later. But today it trades at about $13 a share.
The bulls left C3.ai as valuations spiked, revenue growth cooled and losses widened. Rising interest rates exacerbated that pain by driving investors away from more expensive growth stocks. But could C3.ai make an unexpected comeback this year? Let’s look at the top three reasons to buy C3.ai — as well as three compelling reasons to sell it — to decide.
The three reasons to buy C3.ai
C3.ai develops AI algorithms that can be integrated into an organization’s existing software infrastructure to automate tasks, improve employee safety, save costs and detect financial fraud. It offers these services both as plug-in algorithms and as standalone pre-built services. The bulls are holding on to C3.ai for three reasons: it’s still winning new customers, it expects revenue growth to accelerate again, and the stock looks a lot cheaper than it did at the height of the meme stock rally.
C3.ai terminated the second quarter fiscal year 2023 (which ended last October) with 236 customers, compared to 228 customers in the previous quarter and 203 customers a year earlier. It secured new partnerships with the US military, Alphabets (GOOG 2.32%) (GOOGL 2.12%) Google Cloud, and Microsoft (MSFT -1.65%) last year.
As for C3.ai’s revenue, which is only expected to grow 1% to 2% in fiscal 2023, Siebel predicted on his last conference call that it “could return to a growth rate of more than 30 within the next 18 years.” % on an annual basis”. months.” It expects momentum to return as macroeconomic headwinds ease and large organizations ramp up software spending again.
At its all-time high, C3.ai’s enterprise value reached $16.7 billion — a staggering 91 times the $183 million in revenue it would generate in fiscal 2021. That nosebleed valuation was clearly unsustainable, but the stock now has an enterprise value of just $491 million — less than double the expected revenue for fiscal 2023. Less than 8% of the float was also shortened by Dec. 29, so the bears don’t expect it to drop much further anytime soon.
The three reasons to sell C3.ai
C3.ai’s stock looks a lot less fizzy now, but customer concentration issues, the abrupt transition from subscriptions to usage-based fees, and shrinking margins all suggest the company is still in serious trouble.
C3.ai gets almost a third of its turnover from a joint venture with the energy giant Baker Hughes (BKR -0.65%). That partnership expires in fiscal 2025 and there is no guarantee it will be renewed. Baker already lowered its annual revenue obligations to the joint venture through two renegotiations with C3.ai in 2020 and 2021, and it sold approximately 15% of its equity interest in C3.ai last year. Uncertainty over C3.ai’s future with Baker is likely to keep the bulls away, even as the company forms new partnerships to offset C3.ai’s potential loss of revenue.
In terms of business model, C3.ai initially used a subscription-based model. But last August, C3.ai said it would switch to a usage-based model, charging customers only for the services they access. Siebel claims this change gives it more flexibility as large companies rein in spending to deal with macroeconomic headwinds, but it will also likely reduce revenue per customer and ecosystem vulnerability. Therefore, investors should take Siebel’s forecast for a return to 30% growth with a grain of salt, especially after Siebel repeatedly cut its fiscal 2023 forecast over the past year.
Meanwhile, C3.ai’s gross and operating margins are both going the wrong way as it leverages more promotions and trials to entice customers. Therefore, analysts expect C3.ai to remain highly unprofitable for the foreseeable future.
The risks outweigh the potential benefits
C3.ai is not doomed yet, but the bearish position makes more sense than the bullish one. Unless it can overcome the macro headwinds, renew its deal with Baker and stabilize its margins, there’s no reason to think it’s a bargain at these levels.