A headshot of Siebel, provided by C3.

C3 AI: Because the hype may have gotten out of hand

C3 AI (AI) has been in a slump in public markets this year, up a staggering 260% year-to-date. So you might think that Wall Street would be excited about the AI ​​firm headed by the legendary Tom Siebel, best known for founding and selling software company Siebel Systems.

Not so fast.

Despite the soaring stock price and famed CEO-founder, tech analysts have concerns about the 14-year-old company ranging from the way its executives count customers to its fidgeting as a CFO.

But you can also see why the company has a lot of fans. In 2022, as the AI ​​boom kicked in, C3’s shares soared, pushing the company’s market cap to more than $4 billion as bullish investors claimed the company was indeed a leader in enterprise AI. (After all, they have that precious ticker, AI.)

In the fourth quarter of fiscal 2023, C3 generated $72.4 million, primarily from subscription revenue, and posted a GAAP net loss per share of $0.58.

So who’s 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 step in.

The Case of the Bear

The massive climb in C3 has left some analysts and short sellers wondering if the stock has become too hot to handle. The list of concerns includes concerns about the size of C3’s customer base, CFO revenue, and how the company’s revenue growth stacks up against its competitors.

“Subscription revenues have been broadly flat quarterly over the past three to four quarters, and while they are rapidly improving profitability, they are still burning through cash,” said Kingsley Crane, senior 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 align with the movement and its price, although that’s true for many companies.”

The way C3 counts its customers, which has changed over time, is particularly galling.

“Get the customer straight,” Ben Axler, founder and CIO of Spruce Point Capital Management, said in a June interview with Yahoo Finance Live. “We have now seen multiple reviews of what their customers claim to be. … If I can’t trust the customer [numbers]I can’t trust the income.”

The filing referred to by Axler, who is shorting the stock, includes a section that says the company includes “products and services including paid trials, one-time, subscriptions, and professional service offerings” in its client count.

“There are customer counts and customer entities, and they’ve rephrased and changed the way they calculated those numbers,” Canaccord’s Crane said. (See chart above.)

“For example,” he continued, “if they’re doing business with Shell in three or four different divisions, it would be, based on their count, three to four customers and a customer entity. So the actual number of customers that we typically think of as a customer entity, I would say is probably less than 100.”

At its latest count, C3 says it has 287 customers.

The customer count could indicate another problem: there isn’t enough business yet. Sahm Adrangi, founder of Kerrisdale Capital Management, which is also selling the shares, said: “If this company has a competitive product, why has customer numbers remained relatively flat?”

Additionally, C3 has experienced massive turnover in its role as CFO. Since 2019, C3 has had four CFOs, and that’s a lot. Since 2019, fewer than 10 percent of U.S. public companies with a market capitalization of more than $1 billion had revenue in the CFO position, according to data from Bedrock AI.

In fact, in its 14-year history, C3 has had nine CFOs. While it’s not entirely clear why there’s been so much turnover, Siebel told Yahoo Finance that she relates back to how C3 has evolved and grown.

“We started with three people,” said Siebel, who owns about 6% of C3. “We went from 10 people. We went from 100 people. We went from a US company to a multinational company. I can assure you that it’s a different type of CFO you need to run a company of five people than you need to run a global company of a thousand people.”

The bull case

First off, in case you haven’t noticed, the C3 is in a hot market.

DA Davidson senior software analyst Gil Luria said, “C3 has built a business expected to reach $300 million this year around machine learning and predictive AI applications, which makes the company one of the largest providers of enterprise AI and one of the first pure games 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 forecast is $500 [billion]$600 [billion], $700 billion addressable market opportunity. So this is a great market opportunity as I think we’ve seen.”

But what about customers? Davidson’s Luria believes C3’s customer base lags because, as an enterprise firm, it has a long sales cycle coupled with long-term contracts.

Stanford Graduate School of Business professor Robert Siegel, who conducted a 2018 case study on the company, suggests that C3’s customer base, which currently includes the US Air Force, Raytheon (RTX), and ConEdison, may actually be limited, though that’s not necessarily a bad thing.

“They appear to be strongest with large complex industrial customers who have extremely large datasets and who are not digital natives,” Siegel said. “Does this limit their client base? Maybe in the number of clients…but not necessarily in terms of the size of the opportunities.”

Constellation Research R founder Ray Wang added that there is yet another way to look at C3 growth.

“C3 growth can be seen in two ways: growth in the public sector and growth in the private sector,” he said. “Public sector growth is succeeding because it is taking market share from competitors like Palantir. Private sector growth has been limited to forward-thinking companies that understand its value.”

When it comes to the changing accounts of these customers, Siebel said, “The firm has evolved over the past 14 years, the customer mix has changed very significantly…and we have continued to do our best to deliver as accurately to the market as possible or a representation of the number of customers that we have.”

A headshot of Siebel, provided by C3.

A headshot of Siebel, provided by C3.

The bottom line

No matter what the bears say, for now, C3 shares appear to be on a relentless climb. How does it align with the fundamentals?

Adrangi argues that we should look for rates more similar to Palantir’s growth metrics (PLTR). Some numbers to consider: In 2022, Palantir’s revenue increased 24% year over year to $1.91 billion. C3’s most recent fiscal year revenue (2023, reported in May) was $266.8 million, a 5.6% peak from a year earlier.

But that growth isn’t quite there yet. That said, AI is nascent and the C3 is helping lead the charge. Getting these enterprise AI products to work, despite all the hype we hear about them, is extremely difficult and requires a lot of elbow grease before the product is fully functional and scalable, according to Aaron Fleishman, a partner at Tola Capital.

So are the bulls or the bears right? If you have to choose a side, who do you go with? Ultimately, the decision comes down to how much you buy into the AI ​​hype and Siebel, who has an incredible track record.

At least for his part, the opportunity is clear.

“I think any investor shorting the AI ​​thesis in 2023 is like betting against the internet in 1996,” Siebel told Yahoo Finance.

Allie Garfinkle is Senior Tech Reporter at Yahoo Finance. Follow her on Twitter at @agarfinks and go LinkedIn.

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