C3.ai (AI 3.02%) was one of the hottest tech IPOs of 2020. The developer of enterprise artificial intelligence (AI) algorithms went public at $42 on Dec. 9, and its shares opened at $100 before soaring to an all-time high of $177.47 on Dec. 22.
But today, C3's stock trades at about $29. A $10,000 investment in its IPO would have briefly blossomed to $42,255 before withering to about $6,900 today. The bulls lost interest in C3 for three simple reasons: Its revenue growth slowed down, it racked up steep losses, and rising interest rates popped its bubbly valuations. Its customer concentration issues and abrupt business model changes raised even more red flags.
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Let's see why C3 initially gained so much attention, why it couldn't live up to the market's expectations, and where its stock might be headed over the next few years.
Why did the bulls fall in love with C3?
C3 develops AI algorithms that can be plugged into an organization's existing infrastructure to accelerate and automate certain tasks. Its stock initially skyrocketed for three reasons. First, it was founded by Tom Siebel, an industry veteran who previously founded Siebel Systems and famously sold the company to Oracle for $5.85 billion. Second, C3 was growing like a weed: Its revenue rose 49% in fiscal 2019 (which ended in April 2019) and grew another 71% in fiscal 2020.
Third, C3 went public amid the buying frenzy in meme and growth stocks. As a result, investors were entranced by its catchy ticker symbol and high growth rates while overlooking its steep losses and soaring valuations. At its all-time high, C3's enterprise value reached $16.7 billion -- or 91 times the revenue it would generate in fiscal 2021.
Why did C3's stock collapse?
C3's nosebleed valuations became unsustainable as its growth cooled off. Its revenue rose just 17% in fiscal 2021 as the pandemic curbed the growth of its energy and industrial markets, then grew 38% in fiscal 2022 as those headwinds passed.
Yet that recovery was short-lived. Its revenue only increased 6% in fiscal 2023 -- which broadly missed its original forecast for 22% to 25% growth at the end of fiscal 2022. C3 blamed that weaker-than-expected growth on the macro headwinds, which forced many companies to rein in their software spending. It tried to counter that slowdown by rolling out usage-based plans -- which only charge customers for the services they access -- but that strategy likely cannibalized its stickier and higher-value subscription plans.
As C3's growth cooled off, its flaws became more apparent. It generated about 30% of its annual revenue from a joint venture with the energy giant Baker Hughes (BKR -1.38%), but there's no guarantee that deal will be renewed when it expires in fiscal 2025. C3 also switched the way it counted its active customers as it cycled through three different CFOs since its IPO, and it abruptly abandoned its plan to turn profitable on a non-GAAP (generally accepted accounting principles) basis by the end of fiscal 2024 in favor of ramping up its investments in its new C3 Generative AI Suite.
That plan helped C3 gain some fresh attention as investors flocked toward generative AI stocks, but its insiders still sold more than seven times as many shares as they bought over the past 12 months. C3's stock also still doesn't look cheap at 12 times this year's sales -- even though it's already trading at a 30% discount to its IPO price.
Where will C3's stock be in a few years?
Analysts expect C3's revenue to rise 15% in fiscal 2024 and 20% in fiscal 2025 as the macro environment improves and the AI market expands. But it's also expected to stay deeply unprofitable by both GAAP and non-GAAP measures.
C3 also faces unpredictable challenges. Baker Hughes could decline to renew its crucial joint venture, new generative AI tools could render C3's own AI algorithms obsolete, and big cloud platforms like Amazon Web Services (AWS) and Microsoft Azure could tighten the screws with similar AI services.
C3's messy track record of broken promises also makes it tough to bet on its long-term recovery. Therefore, I believe C3's stock will remain below its IPO price until it overcomes its customer concentration and competitive challenges.
