C3.AI came to the stock market in an orgy of hype about Tom Siebel, the genius behind marketing software business, Siebel Systems, and the outlook for AI (artificial intelligence). The company was heavily loss making and it didn’t have real turnover since it was selling its services to big companies as a proof of concept rather than a real source of revenue. It was also making huge losses. It has been all downhill from there until very recently but suddenly the beast is stirring.
If you are looking for a sober, downbeat assessment of prospects I suspect that Tom Siebel is not your man. Even so, when he talks about ‘a dramatic change from what we experienced in mid-1922’, this is either bullsh***ing of the highest order or something significant. If we give him the benefit of the doubt and look at his business with an objective eye we could have an exciting opportunity here.
I am not going to tell you what they do because I don’t really know but they claim that many enterprise software companies offer products as their whole business which are just features of what C3.AI offers.
Our pipeline of qualified opportunities for the coming year is in excess of 500. As a result of our successful transition to consumption-based pricing, our pilot pipeline has increased, the number of deals we are closing in quarter is increasing, our average selling price is decreasing, our partnerships are strengthening, and our innovation accelerates apace — all of which portend the opportunity for substantially increased revenue growth in FY 24, and beyond while we simultaneously manage the company on a well-engineered path to profitability.
Q3 2023, 3 March 2023
Three months ago C3.AI’s business was valued at close to zero
I have just realised something extraordinary. In December 2022 when the market value of C3.AI fell to $10 the business was valued at $1bn but they had $960m in net cash ($790m as at 31 January 2023) so the business, 10 years of painstakingly built software and a team of 704 employees, over half of whom have advanced degrees and huge expertise in AI, was valued between $40m and $210m. Clearly the shares are a no-brainer to buy at anywhere near $10 unless you believe Tom Siebel is lying through his teeth about what is happening.
He makes no bones about it. He is convinced that C3.AI is going to become one of the world’s great software companies and because he has done it before with Siebel Systems people take note of what he says. The problem has been that so far he has been very good at talking the talk, less good at walking it.
But imagine if that starts to happen. Imagine if C3.AI starts to deliver growth in revenue, ebitda and free cash flow to match the hype. These shares are going to explode.
Again I struggle to make C3.AI a superstar. It’s kind of 3G and it has an exciting something new in the shift from a subscription model to a consumption model which should make the software an easier sell but what it does not have is a classically strong chart.It has a buy signal and a rising Coppock which is encouraging but loads of shares either have that or soon will have. We need more.
Even so I am interested in this one. It is a classic pattern. Shares float in an orgy of hype. Profit takers move in until every loose holder has sold and then the real bull run begins. However I did find this significant reality check from one analyst.
C3.ai ended last quarter, fiscal Q2 2023 with 236 customers. And now? C3.ai ended fiscal Q3 2023 with 236 customers. No growth in customers. If you are not growing your customers, the driving engine of your business, then you don’t have a growth business.
Seeking Alpha, 3 March 2023
This same analyst poured cold water on the switch to a usage based model.
In sum, I have yet to find a single business that successfully employs a usage-based business model.
Seeking Alpha, 3 March 2023
He said, imagine if Netflix charged not a subscription but a price based on how much you watched. I think that might work if the price per hour was reasonable, especially if heavy users had the option of switching to a subscription model. Gyms could easily charge for usage but they don’t. There must be a reason for that; subscription model works better when many people sign up but then don’t make much use of the service.
The other complication with shares like C3.AI is that there are typically hefty short positions in the shares so an unexpectedly bullish earnings report will trigger short-covering and a sharp jump in the share price.
I. guess we have to say the jury is still out on C3.AI. If this business is as exciting as Tom Siebel would have us believe it is going to start to be reflected in the numbers. It makes sense to wait for that to happen before committing to the shares.
Strategy
I hadn’t realised until now the weaknesses of consumption based enterprise software models that they drive rapid growth in the short term but may not be sustainable long-term. This casts a shadow over companies like Twilio and Snowflake which have consumption-based charging models.
I can see the sense of it. Subscription revenue is much more predictable for seller and buyer and should be the way to go. Consumption based models look like a way of making an easy sell at the risk of disenchantment down the line. At some point if the business is really successful the buyer is going to look at this royalty arrangement and think that it is way too expensive and look for a way out.
The consumption based model only works if you don’t use it much which is not great for either party. I think I am being driven towards the same conclusion as the Seeking Alpha guy.
In summary, AI remains a very exciting place to watch.
Seeking Alpha, 3 March 2023
Time and again we have seen a positive statement help shares jump sharply only to relapse as the old worries about rising bond yields and imminent recession resurface. We need a rock solid package to overcome those worries and I am not sure we have that yet for C3.AI.
It’s the thought of what C3.AI could be that makes the shares so exciting but if they are going to do that we can leave a little bit on the table to make sure before we buy. The company is saying that revenue growth is going to accelerate sharply in 2024. The time to buy will be when we see that starting to happen.
