On Dec. 22 , C3.ai's (AI -7.09%) stock closed at an all-time high of $177.47, boosting its market cap to $17 billion. At the time, many investors were dazzled by C3's stellar revenue growth and the disruptive potential of its enterprise artificial intelligence (AI) algorithms -- which can be integrated into an organization's existing software infrastructure to cut costs, optimize workflows, improve employee safety standards, and detect fraud.
But today, C3's stock trades at about $12.50 a share with a market cap of $1.4 billion. Investors fled as its growth cooled off and its losses widened, while other red flags -- including its customer concentration issues, the hiring of three CFOs in just two years, and an abrupt shift from subscriptions to usage-based fees -- hinted at an existential crisis.
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Those issues also cast doubts on the notion that C3.ai could disrupt entrenched tech giants like Salesforce (CRM -7.28%), the world's top provider of cloud-based customer relationship management (CRM) services.
C3's founder and CEO, Tom Siebel, has frequently compared his company to Salesforce, and he once even dismissed the CRM leader's integrated AI tools as "all marketing and very little technology." Yet Salesforce remains much larger than C3. It has a market cap of about $150 billion, and it's expected to generate nearly 120 times as much annual revenue as its tiny industry peer this year. So could C3 still evolve into the next Salesforce over the long term?
The differences between C3.ai and Salesforce
Siebel's previous company, Siebel Systems -- which was acquired by Oracle in 2006 -- notably created the first digital CRM platform in 1995, long before Salesforce launched its first cloud-based CRM services. However, C3 is a very different type of company and approaches the enterprise software market in a more flexible manner than Salesforce.
Whereas Salesforce locks users into its walled garden of cloud-based CRM, sales, marketing, and analytics services, C3 provides AI algorithms that can be plugged in to a wide range of software. For example, C3's CRM platform integrates its AI algorithms into Microsoft's Dynamics CRM platform and Adobe's Experience Cloud (marketing, analytics, advertising, and commerce tools) to create an AI-powered alternative to Salesforce. Alphabet's Google Cloud also integrates C3's AI algorithms into its own services. C3 even provides its AI algorithms as pre-built stand-alone applications.
C3 initially charged recurring subscriptions like Salesforce, but it pivoted to a usage-based model earlier this year. Salesforce's subscriptions are sticky, but C3's approach is more flexible and gives customers more options if they aren't willing to commit to subscription-based contracts.
Salesforce generates more stable growth than C3.ai
Salesforce went public in 2004. Between fiscal 2005 and fiscal 2022 (which ended this January), its annual revenue soared from $176 million to $26.49 billion, representing a compound annual growth rate (CAGR) of 34.3%. It grew so rapidly for four reasons: It established a first-mover's advantage in the cloud-based CRM market, it benefited from the long-term digitization of businesses, it expanded through acquisitions, and it locked in its users with sticky services and subscriptions.
C3 doesn't boast those same strengths. It's carving out a niche market instead of establishing a mainstream one, it's building open software solutions instead of walled gardens, and it doesn't have enough cash to make big ecosystem-building acquisitions yet. It also has a customer concentration issue: It generated 30% of its revenue from a joint venture with the energy giant Baker Hughes last year -- and that crucial deal will expire in fiscal 2025.
To make matters worse, C3's growth is already cooling off. Its revenue surged 71% in fiscal 2020 (which ended in April 2020), but rose just 17% in fiscal 2021 as the pandemic disrupted the energy and industrial markets.
Its revenue grew 38% to $253 million in fiscal 2022 as those headwinds dissipated, but it anticipates just 1% to 7% growth this year as the macro headwinds prompt enterprise customers to curb their spending. By comparison, Salesforce -- which faces many of those same headwinds -- still expects its revenue to rise 17% to about $31 billion this year.
Siebel believes C3's annual revenue growth will "revert to historical annual growth rates" of over 30% in fiscal 2024 "and beyond," but that's a tall order for a company that has repeatedly missed and reduced its own guidance over the past year.
C3.ai won't become the next Salesforce
It's highly doubtful that C3 will evolve into a tech titan like Salesforce. Instead, it will likely remain a niche provider of AI algorithms that is tightly tethered to the macro-sensitive energy and industrial markets. Investors who are looking for a long-term play on the digitization and automation of businesses should simply stick with Salesforce instead of betting on a poorly diversified AI software developer like C3.
