C3 AI (AI) has seen a tear in the public markets this year, up a staggering 260% year-to-date. So you’d think Wall Street would be all for the artificial intelligence company headed by the legendary Tom Siebel, known for founding and selling software company Siebel Systems.
Not so fast.
Despite soaring stock prices and the famous CEO-founder, tech analysts are worried about the 14-year-old company, from how its executives count customers to its mix of chief financial officers.
But you can also see why the company has a lot of fans. In 2022, when the AI boom kicked off, shares of C3 soared, pushing the company’s market capitalization above $4 billion as optimistic investors argued that the company was indeed a leader in enterprise AI. (They do, after all, have that prized symbol, the AI.)
During the fourth quarter of fiscal 2023, C3 generated $72.4 million, primarily from subscription revenue, and recorded a GAAP net loss per share of $0.58.
So, who is right ? Is C3 a rising star or a supernova? Or something in between? Yahoo Finance has asked analysts and short sellers on both sides to comment.
The case of the bear
C3’s massive rise has left some analysts and short sellers wondering if the stock has gotten too hot to handle. The list of concerns includes worries about the size of C3’s customer base, CFO revenue and how the company’s revenue growth compares to that of its competitors.
“Subscription revenue has been essentially flat for the past three or four quarters, and while it’s rapidly improving profitability, it continues to burn cash,” said Kingsley Crane, principal analyst at Canaccord Genuity. “So when you look at revenue, growth, and profitability…it’s in the bottom quartile for software companies in public markets.”
He added: “I’ve said this before, but I think the fundamentals of C3 don’t necessarily match the move and its price, although that’s true for many companies.”
The way C3 counts its customers, which has changed over time, is particularly vexing.
“Ask about the client,” Ben Axler, founder and CIO of Spruce Point Capital Management, said in a June interview with Yahoo Finance Live. “We have now seen several revisions to what they claim to be their clients. … If I can’t trust the client [numbers]I can’t trust the earnings.”
The filing to which Axler, which is shorting the action, refers to includes a section that states that in its customer count, the company includes “products and services, including paid trial, one-time, subscription and professional services offerings.”
“There are client numbers and client entities, and they reworded and changed the way they calculated those numbers,” Canaccord’s Crane said. (See table above.)
“For example,” he continued, “if they do business with Shell in three or four different divisions, that would be, based on their count, three to four customers and one customer entity. So the actual number of customers – what we generally consider to be one customer entity – I would say is probably less than 100.”
In its latest count, C3 indicates that it has 287 customers.
The number of customers can indicate another problem: there just isn’t enough business yet. Sahm Adrangi, founder of Kerrisdale Capital Management, which also sells the stock short, said: “If this company has a competitive product, why has the number of clients remained relatively stable?”
Additionally, C3 has experienced massive turnover in its CFO role. As of 2019, C3 has four CFOs, and that’s a lot. Since 2019, less than 10% of U.S. public companies with a market capitalization of more than $1 billion have achieved CFO revenue, according to data from Bedrock AI.
In fact, in 14 years of history, C3 has had nine chief financial officers. While it’s not entirely clear why there’s been so much turnover, Siebel told Yahoo Finance it harkens back to how C3 evolved and grew.
“We started with three people,” said Siebel, who owns about a 6% stake in C3. “We went to 10 people. We went to 100 people. We went from an American company to a multinational. I can assure you that you need a different type of CFO to run a company of five people than to run a global company of a thousand people.”
The case of the bull
First of all, in case you haven’t noticed, C3 is in a hot market.
Gil Luria, senior software analyst at DA Davidson, said, “C3 has built a business that is expected to hit $300 million this year around machine learning and predictive artificial intelligence applications, making the company one of the largest vendors of enterprise AI, and one of the first pure players in this space.”
For Siebel, the potential size of the AI market is critical to C3’s growth potential.
“Generative AI alone is over, I think, $1.2 billion,” he said. “If we look at enterprise AI…even without generative AI, the predictions are $500 [billion]$600 [billion], a $700 billion addressable market opportunity. So that’s just as big of a market opportunity as I think we’ve seen.”
But what about customers? Davidson’s Luria thinks C3’s customer numbers are lagging because, as a business, it has a long sales cycle coupled with long-term contracts.
Robert Siegel, a lecturer at the Stanford Graduate School of Business who conducted a case study on the company in 2018, suggests that C3’s customer base, which currently includes the US Air Force, Raytheon (RTX) and ConEdison, might indeed be limited — though that’s not necessarily a bad thing.
“They seem to be stronger with large, complex industrial customers who have extremely large data sets and are not digital native,” Siegel said. “Does that limit their customer base? Maybe in number of customers…but not necessarily in size of opportunity.”
Constellation Research founder R “Ray” Wang added that there is yet another way to look at C3’s growth.
“C3 growth can be viewed in two ways: growth in the public sector and growth in the private sector,” he said. “Public sector growth succeeds because it takes market share from competitors like Palantir. Private sector growth has been limited to forward-looking companies that understand value.”
Regarding the evolution of accounting for these customers, Siebel said, “The company has evolved over the past 14 years, the composition of customers has changed very significantly…and we have continued to do our best to provide the market with as accurately as possible or a representation of the number of customers we have.”
The bottom line
No matter what the bears say, at the moment C3 stock seems to be on a relentless ascent. How does this align with the fundamentals?
Adrangi argues that we should look for rates closer to Palantir’s Growth Measures (PLTR). Some numbers to consider: In 2022, Palantir’s revenue grew 24% year-over-year to $1.91 billion. C3’s last fiscal year revenue (2023, released in May) was $266.8 million, up 5.6% from the previous year.
But that growth isn’t quite there yet. That said, AI is nascent — and C3 is helping lead the charge. According to Tola Capital partner Aaron Fleishman, getting these enterprise AI products to work, despite all the bluster we hear about, is extremely difficult and requires a lot of elbow grease before the product is fully operational and scalable.
So, are the bulls or bears right? If you have to choose a side, who do you ride with? Ultimately, the decision is based on how much you buy into the AI hype — and Siebel, which has a hell of a track record.
For its part at least, the occasion is clear.
“I think any investor taking a short on the AI thesis in 2023 is like betting against the internet in 1996,” Siebel told Yahoo Finance.
Allie Garfinkel is a senior technical reporter at Yahoo Finance. Follow her on Twitter at @agarfinks and on LinkedIn.
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