With the release of ChatGPT, artificial intelligence has again become a hot topic for investment. One of the hottest AI stocks has arguably been C3.ai (AI 0.72%), a 14-year old tech company that went public in late 2020 at $42 per share.
Today, the stock trades at about half of that value, despite having nearly doubled since the beginning of the year. C3.ai took its hits because of slowing revenue growth and widening losses, but rocketed higher this month after announcing the launch of a "generative AI" product suite that was like ChatGPT, but for enterprise search. Businesses will be able to quickly locate, retrieve, and present data from across their entire enterprise.
It was a timely announcement by C3.ai, given all the interest in OpenAI's chatbot, and the tech company said it was going to incorporate ChatGPT into future iterations of its products. But is that enough to warrant an investor putting money into the stock? Let's look closer to find out.
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A technological chameleon
Artificial intelligence is certainly the buzzworthy phrase of the day, but so was the Internet of Things and carbon emission cap-and-trade before that. Notably, C3.ai pursued those two trends with equal vigor before its current iteration as an AI stock.
C3.ai was originally founded as C3 Energy and considered itself an "energy and emissions management" operation. A few years later and it was seeking patents for "systems, methods, and devices for an enterprise internet-of-things application development platform."
Today, the company sees itself at the forefront of the generative AI movement, meaning that the company strives to build artificial intelligence that can actually create new content rather than just analyze existing data. CEO Tom Siebel says C3.ai's new product suite "fundamentally changes the human computer interaction model of enterprise application software."
There is some good reason to think C3.ai can exploit this opportunity, as it has signed partnerships with some of the largest tech companies, including Alphabet, Amazon, and Intel. Another partner, Microsoft, happens to have recently invested in ChatGPT's owner, OpenAI.
The short story on the hype
C3.ai has reportedly spent a decade and around $1 billion to develop its business, and is now ready to reap the rewards. Yet it has changed its business model to be based on consumption rather than subscriptions, which could upend revenue.
It currently generates around 30% of sales from energy giant Baker Hughes, which originally took a minority equity position in C3.ai for $69 million and put its CEO on the Board of Directors, though that partnership looks to be souring.
Noted short seller Spruce Point Capital Management says C3.ai has significantly revised its agreement with Baker Hughes and grants more concessions each time. The energy company has sold 20% of its stake in C3.ai, and Baker Hughes CEO Lorenzo Simonelli resigned from the board at the end of 2021.
Spruce Point also questions the value and strength of some of C3.ai's other partnerships, such as with Microsoft and Amazon. It raises questions about its cash flows and profit potential, noting it has never had a profitable year and could generate losses in excess of $100 million in 2023.
Image source: Getty Images.
Less than what meets the eye
In an update on its previous report, the short seller reiterated its bear thesis and believes C3.ai is merely being opportunistic in the language it used in its product suite launch release. It says there is not a single mention of "generative AI" in any of its SEC filings, including its fiscal second-quarter earnings report that was issued only in December.
Interviews with former sales and technology executives and employees also cast doubt on the transformative nature of C3.ai's patented AI, which tech publication ZDNet has described as "really a platform-as-a-service for the Internet of Things with some fairly standard AI mixed in."
While Spruce Point obviously has a financial interest in seeing C3.ai's stock decline, it does raise questions of just how significant its advances are and whether the company can turn profitable on an adjusted basis by the end of 2024, as management forecasts.
Risky business
C3.ai is not alone, as the entire artificial intelligence market is only beginning to just get its bearings now. While some companies -- such as Amazon, Microsoft, Nvidia, and even a few start-ups -- are successfully forging their way forward, there is an industry-wide shakeout coming. Especially with such steep competition, C3.ai seems much too risky to buy.
Losses are growing and operating margins are shrinking. What's more, C3.ai is burning through cash, and its largest revenue contributor could be having second thoughts. The agreement with Baker Hughes expires in 2025 and there's no guarantee of renewal. The bear case against C3.ai seems to outweigh its bullish potential, and I would hesitate to be a buyer here.
