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Investing Deep Dive: Is C3.ai (NYSE: AI) A Future World-Beating Stock?
AI hype has taken off in 2023, so we're looking at C3.ai to determine if it has the growth potential to supercharge your portfolio.
Deep Dive Focus: C3.ai (NYSE: AI)
Market Cap: $2.736M
Stock Price: AI 0.00%↑ $25.83 (US) (as at time of publishing)
Until not too long ago, Artificial Intelligence (AI) was the stuff of science fiction. Evil computers sought the destruction of humanity in films like The Matrix, The Terminator and iRobot. Quirky and intelligent robots pottered about on screen in Star Wars or provided a window into love and emotional growth in the pages of Kazuo Ishiguro’s Klara and the Sun.
But AI is no longer just the stuff of fiction.
According to a 2017 survey by MIT, a fifth of companies had incorporated AI into at least some of their products or processes. This has only accelerated in the years since and the recent emergence of ChatGPT and other AI innovations has heightened interest in the technology and the companies which construct it.
One of the biggest names in the AI game is C3.ai (NYSE: AI), which is looking like one of the most exciting growth stocks out there. So let us take you through the company’s story, its roster of products and its underlying numbers to help you understand how it could be an asset to your portfolio.
The C3.ai Story
When delving into the company’s backstory, there’s only one place to start.
We can’t talk about C3.ai without talking about the businesses which came before, like Oracle and Siebel Systems. That’s because they are a huge part of the company’s DNA. Indeed, CEO Thomas Siebel lends his name to one of the companies, while three of the four members of the executive team have spent time at Oracle and Siebel Systems.
Oracle was an early mover in database management and, through a combination of innovation and acquisitions, maintained its position as a dominant player in the business and commercial software game. Using what he had learned at Oracle, Siebel co-founded his own company, Siebel Systems, in the early 1990s.
The new business was geared towards sales automation and customer relationship management (CRM), becoming a dominant force in the latter by gaining a 45% market share by 2002. Eventually, Oracle came calling and agreed to snap up the business for $5.8bn in 2005.
The next big idea was the company which would become C3.ai. But it didn’t start simply.
The business was originally focused on helping customers manage their carbon footprint under the simple name C3. Things didn’t initially go well, with two-thirds of the workforce laid off in 2012 as the company rebranded as C3 Energy and pivoted to aiding energy companies with enterprise software powered by machine learning.
This successful evolution led the company down the road to further diversification around the theme of AI-centric enterprise software, which it calls enterprise AI, formulating applications to serve industries from aerospace to manufacturing.
C3 Energy has transformed into the C3.ai we see today, achieving unicorn status on the way and now teetering on the edge of the AI revolution.
What is Enterprise AI?
So, what exactly do we mean when we talk about enterprise AI? Well C3.ai’s CEO, Thomas Siebel, explains the phrase below.
So, in enterprise AI we have technologies that are designed to shape businesses for the future by utilizing artificial intelligence to smooth challenging or outdated processes and solve complex problems.
C3.ai argues that its enterprise AI applications can solve previously unsolvable problems, claiming that the use cases for enterprise AI applications are unlimited. That’s why it says organizations across virtually every industry are deploying enterprise AI applications to address a broad range of use cases, from predictive maintenance for a vast array of industrial assets to inventory optimization, fraud detection, anti-money laundering, securities lending optimization, customer retention, and more.
Essentially, embracing enterprise AI is how businesses can enjoy digital transformation. In the coming years, nearly every enterprise software application will be AI-enabled. As such, C3.ai argues that developing competencies in the ability to build, deploy and operate enterprise AI applications at scale is a massive opportunity for growth.
So how does this translate into an actual array of products?
A great deal of the strength of C3.ai is in its wide-ranging and advanced product offering.
Here, we’ll offer an overview of the applications C3.ai uses to kickstart digital transformation. This will take us through three distinct sections of the business and offer a comprehensive overview. Let’s get started.
This section of the business’s offering is comprised of ready-to-use applications designed for specific purposes. Each app falls into one of eight categories, or “suites” as C3.ai likes to refer to them. Let’s break them down individually to understand the wide variety of applications for the company’s product offering.
First up, it’s the steady hand on the tiller of the group. The company’s reliability suite aims to offer people like maintenance managers and engineers the kind of AI assistance to make their jobs run much more smoothly.
C3.ai says its technology can monitor anomalous activity using a wide variety of data sources and use predictive analysis to identify problems before making sure assigned maintenance or repair is performed quickly and efficiently through the use of prioritized alerts, prescriptive actions and integrated workflows.
The company argues that this kind of solution reduces customers’ maintenance costs while maximizing operational efficiency and uptime. For companies who can’t afford to see their machinery break or fall out of action, you can see why the Reliability Suite could be an asset.
The Reliability Suite also includes AI Process Optimization and AI Turnaround Optimization applications.
From the Supply Chain Suite, we’re taking a look at C3.ai’s AI Supply Network Risk application. This application is designed to help increase customer awareness of issues like delays, delivery risks and manufacturing bottlenecks. The application uses internal and external data sources to predict and resolve issues involving supply chain disruption.
C3.ai claims that the demonstrable benefits of the application include a 3-6% improvement in product availability and a 5-10% increase in on-time-in-full performance.
Other applications from this suite include AI Inventory Optimization, AI Production Schedule Optimization, AI Sourcing Optimization and AI Demand Forecasting.
Environmental issues are of increasing importance for businesses across all sectors. C3.ai’s Sustainability Suite includes AI ESG, an application designed to help customers accurately report their ESG performance and monitor progress towards green goals.
The business styles this tool as an asset for businesses looking to keep up with rapidly evolving ESG reporting requirements and regulatory changes, arguing that the centralized and automated nature of the tool increases the availability of key data and minimizes risk.
Other applications in the suite include AI Sustainability for Manufacturing and AI Energy Management.
C3.ai’s CRM, or Customer Relations Management, suite contains just a single application. This application includes in-depth visualizations of sales, market and customer data, and also uses machine learning to create predictions and recommendations to aid sales, marketing and customer services efforts.
The company claims that its product boosts revenues by an average of 4%, results in a 24% increase in customer win rates and a 60% reduction in churn rate.
There is increasing regulatory pressure on financial institutions to recognize the signs of financial crime and suspicious activity within their organization. C3.ai’s AI Anti-Money Laundering application is designed to streamline detection efforts by boosting accurate detection and cracking down on false positives.
The business says its technology boosts the successful detection of money laundering efforts by 200% and reduces false-positive alerts by approximately 85%.
Beyond money laundering, the suite also contains an AI Smart Lending application and an AI Cash Management application.
Defense & Intelligence
C3 AI Intelligence Analysis allows customers to unify data feeds and enjoy access to AI-generated insights designed to help them avoid making decisions based on ‘gut feeling’ and other emotional responses.
However, the application process does not seek to inhabit the role of decision-maker and instead gives human investigators and analysts a user-friendly interface which it says will allow them to efficiently aggregate, explore, annotate, and analyze structured and unstructured datasets.
There are more C3.ai Defense & Intelligence applications too, with these coming in the form of AI Readiness and AI Decision Advantage.
State and Local Government
This suite of products is specifically aimed at customers from the public sector. It notably includes the AI Law Enforcement application, which aims to improve public safety by improving investigative efficiency.
This means creating a unified home for disparate forms of data, detecting false data, providing intelligent analysis and promoting cooperation through in-app collaboration capabilities.
Other applications within this suite include AI Commercial Property Appraisal and AI Residential Property Appraisal.
Oil and Gas
This is C3.ai’s largest product suite, so picking out a single application to focus on is challenging. It’s worth noting that these products stem from the company’s collaboration with Baker Hughes.
We’ve opted to discuss the company’s Production Optimization application, which seeks to enable a project’s engineers to visualize, analyze, and optimize upstream operations.
The company claims that demonstrated benefits from this application include a 15-20% improvement in production forecast accuracy and a 2-5% increase in hydrocarbon production from holistic injection optimization.
Aside from this, other applications focus on supply chain optimization, ESG, sustainability, reliability and much more besides.
Beyond pre-made applications, C3.ai also allows customers to purchase AI development infrastructure. These are comprised of low-code and no-code applications - and are split into two separate product offerings.
C3 AI Studio
This is the business’ low-code development application. It allows computer programmers to build their own AI applications using a purpose-built interface that is designed not to interfere with the development experience professionals are accustomed to.
Services within the AI Studio include JupyterLab, which provides comprehensive data interfaces, and Application Canvas, which improves the capability of multiple parties to cooperate on the same complex development project.
C3 AI Ex Machina
This is a no-code development tool, which opens up data analysis tool development to people who might not typically have the technical expertise or time to build tools with code. The product functions as a complete platform that ingests data and allows analysts to quickly build projects which output AI insights.
It can also act as a shared platform for a huge amount of a company’s data, with third-party applications and data treasure troves like Snowflake, Databricks, BigQuery, Salesforce, SAP and Oracle all able to feed into Ex Machina.
This creates a shareable storage area for data, in which analysts can build datasets and analysis tools used to inform a company’s actions and decision-making process.
This product is available through two monthly subscription offerings, with a 15-day free trial also offered.
Sales and Strategy
Now we know C3.ai’s roster of products inside out, it’s worth taking the time to examine its sales process.
A key point here is the business’ transition to a consumption-based pricing model. Put simply, this means the more customers utilize C3.ai products the more they end up paying per month.
Speaking about the change on an earnings call in August, CEO Thomas Siebel said: “These measures, in aggregate, will allow us to accelerate sales cycles, accelerate product adoption, increase market share, increase revenue growth and increase profitability.”
He also acknowledged that it could have a detrimental effect on revenue in the short term but would allow the business to gain more contracts with smaller customers. It’s a move that brings the company in line with the broader cloud marketplace and removes the need for time-consuming negotiations when signing up new customers.
C3.ai’s partner ecosystem is also a major part of its strategy.
This is a network of strategic relationships with major tech players, including Baker Hughes, Amazon Web Services, Google Cloud, Microsoft and Raytheon. These partners can act as resellers of the company’s services and also offer C3.ai a variety of positives.
For example, partnering with a major player in a particular industry, let’s say Baker Hughes in the oil and gas industry, allows C3.ai to work with one of the top dogs on tailor-made solutions. These tried and tested solutions can then be packaged and sold to other companies within that industry.
Other partnerships might be more geared toward technological infrastructure. In this case, teaming up with an entity like Amazon Web Services can enable C3.ai to ensure its software offerings are compatible with a widely used cloud software provider, broadening the appeal and reach of its products.
When combined, C3.ai has developed a strategy that allows it to develop industry-specific solutions with guidance from landmark names, while also expanding the reach of its sales network and boosting the appeal of its offering.
Here’s a list of some of the major customers C3.ai has managed to net with this strategy:
US Air Force
US Department of Defense
AI and Tech Market Overview
A significant factor in the company’s success is continued growth in the AI market. C3.ai seems to have this factor on its side, at least over the longer term, with artificial intelligence widely being hailed as the next major leap forwards in human innovation.
Indeed, the global AI market size was estimated at $119.78bn in 2022 and is expected to hit $1,591.03bn by 2030 with a registered CAGR of 38.1%, according to data from Precedence Research.
It appears the industry has been thriving for the last few years. According to the US Department of Commerce’s International Trade Administration’s Global Artificial Intelligence Market Report, 2021 saw AI global funding double to $66.8bn and a record 65 AI companies reaching valuations above $1bn valuations, up 442% from the previous year.
Additionally, research from PwC claims that AI could contribute up to $15.7trn to the global economy in 2030. This is more than currently contributed by India and China put together.
Whichever way you look at it, AI seems like this decade’s major advancement in technology.
But what about short-term conditions?
Well, AI stocks have had a strong year so far, though this appears to have been largely caused by the hype surrounding the emergence of popular and groundbreaking AI tech like ChatGPT. You can observe the enormous leap in search traffic caused by these developments, which has formed a wave of excitement to sweep C3.ai and other AI-exposed stocks higher.
We can also observe this in the performance of exchange-traded funds (ETFs) which focus on AI and automation. For example, the S&P Kensho Smart Factories ETF, which counts C3.ai as one of its top exposures, is up by 11% across the year-to-date but down by 15% since its inception in September 2021.
However, we’re still in a bear market at the moment. This means that many growth stocks, like C3.ai, are not as attractive to investors who are looking for a safe haven. The tech-heavy NASDAQ is down by more than 20% from highs reached in the fourth quarter of 2021.
But many tech stocks have rallied since the new year, with this being aided by investors seeking large profitable entities with limited reliance on the financial institutions which have been rocked by liquidity issues over the last few weeks.
Even so, increasing interest rates and the continued risk of recession have not created the ideal environment for growth stocks, a category which most tech stocks fall into.
However, for C3.ai at least the anticipated explosion in the popularity of AI is a promising sign for long-term investors. This could all mean the present climate is an opportunity to pick up promising growth stocks like C3.ai for a reduced price.
The business most recently reported earnings in February, which covered the three months that ended 31 January.
The report showed revenue of $66.7m, which exceeded guidance of $63m to $65m but fell short of the $69.8m achieved in the same period last year. However, revenue for the nine months ended 31 January was still up by 8% to $194.4m, indicating general growth.
The bulk of C3.ai’s revenue stems from subscriptions, having accounted for 89% across the year-to-date. This proportion is increasing, with professional services revenue, which is C3.ai’s only other revenue stream, having fallen by 30% to $20.8m since last year. To a certain extent, this reliance on subscriptions creates reliable recurring revenue and adds stability to the company’s income streams.
The trend of revenue growth is not yet translating to improved earnings though. For the year-to-date, the cost of sales has increased by 33% and total operating expenses by 28%, with both gobbling down a sizable chunk of the business’ capital.
Consequently, net losses for the first nine months of C3.ai’s current financial year have increased from $133.6m to $203.9m. The diluted net loss per share has lifted from $1.29 to $1.87.
Additionally, C3.ai reported that it had $789.8m in cash, cash equivalents, and investments.
So, these earnings don’t exactly read like the most exciting thing in the world. Losses are up, costs are rapidly increasing and revenue appeared to stumble in the most recent quarter.
But that doesn’t tell the full story.
First off, the business is still coming off the back of a change to consumption-based pricing, which was always expected to initially lead to a revenue hit.
Despite that, C3.ai still beat expectations in this department. In fact, the company has now beaten its revenue guidance for eight consecutive quarters.
That’s not a bad record!
Additionally, the business currently has a higher-than-usual mix of customers in the pilot phase, where they enjoy unlimited runtime and access to premium support resources for a flat charge. This means margins are under some pressure, as the business is facing all the costs of providing its services without receiving as much revenue as normal.
However, the graduation of these customers from the pilot phase to full-fledged paying punters could correct this over time as they transition to the consumption-based pricing model after two quarters.
Meanwhile, the business says it remains on track to become cash positive and profitable by non-GAAP measures before the end of its next financial year. With a significant amount of cash in the bank, C3.ai has the capital to turn things around until it hits that marker on the timeline and achieving the goal would feel like a major coup.
With these factors considered, C3.ai’s earnings look quite positive and shed light on the exciting growth of this ambitious business.
It’s also worth using some common valuation metrics to examine C3.ai further. They’ll give us a bit more insight into how the company’s financial situation and stock price square off against each other, among other things.
The business has a price-to-sales ratio of 8.77, higher than the 7.73 average for the industry according to CSIMarket. While this might indicate a slightly inflated value compared to its peers, it's worth considering that the company’s sales figures are still being impacted by its change in pricing model.
C3.ai’s price-to-book value is 2.56, well below its contemporaries' average reading of 10.02. Contrary to its P/S ratio, this actually points to C3.ai stock being undervalued, a surprise given the stock’s major jump this year.
C3.ai Stock Price
As we have already mentioned, the business was first listed through an IPO in December 2020. This was a roaring success for C3.ai, with the company raising $651m and even raising questions from some outlets about whether it might have sold itself short with its listing price.
The stock entered the NYSE at around $120 a pop, with this rising to north of $160 before the month was out. However, the stock has not reached these heights since.
A key factor behind the decline in share price is the ‘D’ word: Dilution.
C3.ai relies heavily on stock-based compensation to pay its employees, so shareholders have seen their interest in the company devalued since its IPO.
However, there has been a light at the end of the tunnel. That’s because the year-to-date has seen C3.ai stock more than double in price, rising by more than 105% since 1 January. Even with this huge jump, shareholders who bought into the company at IPO are a long way off breaking even as the share price sits at $22.75 at the time of writing.
However, prospective investors curious about backing the company now might have the opportunity to get on board with a well-placed and cutting-edge business while its share price appears relatively cheap by some metrics.
A flood of tech companies is embracing AI and bringing out their own applications, or using other methods to promote business modernization and automation. Here we take a brief look at some of C3.ai’s competitors whom you might not have heard of.
UiPath (NYSE: PATH) – Market Cap: $8.94bn - A business offering AI-powered software designed to automate and provide insights on company processes. Like C3.ai, the company has attracted significant investor attention this year, though its share price remains significantly below the levels it reached after its IPO in 2021.
Palantir Technologies (NYSE: PLTR) – Market Cap: $16.9bn - This company, founded by billionaire venture capitalist Peter Thiel, is a specialist in data analytics that claims to offer flexible tools which can be used for a wide variety of applications. Palantir has reached profitability but could have hamstrung itself with overly ambitious targets.
nCino (NASDAQ: NCNO) - Market Cap: $2.46bn - This company specializes in streamlining customer interactions for businesses in the financial services space, aiming to increase the efficiency of customers’ operations and speed up application and decision-making processes.
Progress Software (NASDAQ: PRGS) - Market Cap: $2.54bn - This business software application and platform specialist has achieved impressive share price growth over the last 12 months. It has bucked the trend on the back of some solid revenue and earnings growth but is not anywhere near as geared towards AI as C3.ai and some other competitors.
Intapp (NASDAQ: INTA) - Market Cap: $2.54bn - This is another competitor specifically geared towards the financial services space. It aims to help asset managers, private equity firms and more to connect their people, processes and data to streamline processes.
Rapid7 Inc (NASDAQ: RPD) – Market Cap: $2.43bn - This company’s data collection platform aims to provide threat detection and automation. It’s a specialist in cybersecurity that has seen its share price decline significantly in the last year, with this appearing to be due to shareholder annoyance at weak guidance.
Siebel is the founder and chief executive officer of C3 AI.
He was the founder and chief executive officer of Siebel Systems, one of the world’s leading software companies. Founded in 1993, Siebel Systems pioneered the CRM software market, becoming the global leader with more than 8,000 employees in 32 countries, over 4,500 corporate customers, and annual revenue of over $2bn in less than seven years. Siebel Systems was acquired by Oracle Corporation in January 2006 for $5.8bn.
Additionally, he serves as the chairman of the Thomas and Stacey Siebel Foundation. Established in 1996, the Foundation funds projects to support energy solutions, educational and research programs, public health, and the homeless and underprivileged. In 2015 the Foundation launched the Siebel Energy Institute, a global consortium for innovative and collaborative energy research for the public domain.
The Siebel Energy Institute fosters research collaboration among premier universities and spurs the greatest minds in engineering and computer science to address the most pressing energy challenges of our time.
Finally, Siebel serves on the College of Engineering boards at the University of Illinois and the University of California, Berkeley. He is a director of the Hoover Institution at Stanford University and is a member of the American Academy of Arts and Sciences.
Edward Y Abbo – President and Chief Technology Officer
Abbo has served as Chief Technology Officer since July 2011. He previously served as Chief Executive Officer from September 2009 to July 2011 and was a member of the board of directors from August 2009 to November 2020.
Before joining C3.ai Abbo served as Senior Vice President of Engineering and Chief Technology Officer for Siebel Systems from July 1994 until it merged with Oracle Corporation in January 2006, and as Senior Vice President of Oracle Corporation from January 2006 to July 2009.
Abbo holds a B.S. in Mechanical and Aerospace Engineering from Princeton University and an M.S. in Mechanical Engineering from the Massachusetts Institute of Technology.
Houman Behzadi – President and Chief Product Officer
Behzadi has served as Chief Product Officer since October 2016. He previously served as C3.ai’s Senior Vice President and Chief Product Officer from October 2016 to July 2020, Senior Vice President of Products and Engineering from July 2012 to October 2016, and Vice President of Engineering from January 2010 to July 2012.
Before joining the company, Behzadi held various leadership roles with Siebel Systems from January 2001 until it merged with Oracle Corporation in January 2006, and then served as Director, of Application Development at Oracle Corporation from January 2006 to January 2010.
Behzadi holds a B.A. in Economics from the University of California, Santa Barbara.
Juho Parkinnen – Senior Vice President and Chief Financial Officer
Parkkinen has served as C3.ai’s SVP and Chief Financial Officer since March 2022. He has served as the company’s principal accounting officer since December 2021, and from February 2021 to December 2021, he served as the company’s Vice President and Corporate Controller.
From March 2017 to January 2021, Parkkinen held various positions in the financial reporting group at MongoDB, Inc., a software company. From September 2009 to February 2017, he held positions at Ernst & Young.
Parkkinen holds a B.S. in Business with an emphasis in Accounting and Mathematics from Santa Clara University and is a Certified Public Accountant in the State of California.
C3.ai could be a major investment opportunity, but it's important to weigh the positives and negatives of adding the stock to your portfolio. Indeed, the stock appears to split analysts down the middle, with current broker coverage comprising two Buy recommendations, two Sell Recommendations and eight Hold recommendations according to FactSet.
As such, we’ve separated the bull and bear cases for investment in the company as our final take.
C3.ai could be an opportunity to get on board with an enormously important emerging technology at the ground level. The company’s advanced offering is unrivalled in the AI field and diverse enough to cater towards customers across a broad range of sectors, insulating it from financial struggles that might affect one particular part of the market.
This could have given the company a head start as a provider of a technology set to change the way we do… well, everything. Most experts seem to agree with the transformational potential impact AI will have.
For example, last week Microsoft co-founder Bill Gates commented:
"It will change the way people work, learn, travel, get health care, and communicate with each other."
In a technology that has such a wide-spanning impact, there is serious cash to be made.
This is the key to the investment case for C3.ai. In the short term, the stock price is likely to fluctuate as the market blows hot and cold on AI hype and the state of the company’s financials. After all, growth stocks are known for their volatility. E-commerce giant Amazon lost more than 90% of its value in the two years after the dot com bubble burst.
However, if AI takes off as predicted and C3.ai can exploit its solid position, long-term growth could be enormous.
C3.ai is currently targeting profitability by the end of its next financial year. At current cash burn levels, it has time to spare on that goal. Doing so would be a major turning point for the business, but also just a checkpoint in C3.ai’s journey to major growth.
While there is a lot to like about the stock, there are some red flags. First off is the company’s massive reliance on its contract with Baker Hughes, which accounts for around 30% of its annual revenue. It’s currently two years until this deal runs out and, unless C3.ai finds itself some major new customers, it’s going to hurt if Baker Hughes decides not to renew.
Next, there’s simply the company’s financial situation. In the earnings section, we explained the mitigating factors behind C3.ai’s dip in revenue and its widening losses.
However, it's possible that 12 months down the line C3.ai’s consumption-based revenue model might not have translated to more money coming in. After all, the model is reliant on businesses using C3.ai’s products more. What if the products don’t end up being as transformative as anticipated?
If that’s the case, then the scale can slide the other way too. Many of C3.ai’s contracts will significantly deteriorate in value. In short, the business could live and die by the quality and usefulness of its offering.
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