C3.ai Stock: Buyer Beware (NYSE:AI)

C3.ai’s (NYSE:AI) stock saw a 137% increase as of February 8th’s close, reflecting the excitement surrounding recent advancements in AI. This topic has been extensively covered in my previous writings. For example, on January 30, I published a bullish article on NVIDIA (NVDA), arguing that ChatGPT would be a major growth catalyst for the company.

I have a positive outlook on AI, but I advise investors to approach with caution and not make impulsive decisions based solely on the hype. In this article, I will highlight the potential risks associated with investing in C3.ai.

Business Overview

C3.ai is a technology company that specializes in the development and delivery of artificial intelligence (AI) and advanced analytics solutions for the enterprise. The company provides pre-built applications and software platform services designed to help organizations transform their operations using AI. These solutions are designed to support a wide range of use cases and industries, including energy, manufacturing, financial services, and healthcare. C3.ai’s offerings are designed to help organizations gain insights, automate processes, and improve decision-making through the use of AI and advanced analytics. Additionally, the company’s offerings are built to be scalable and easily integrated with existing IT systems and infrastructure.

If It Walks Like a Meme and Quacks Like a Meme…

C3.ai had its initial public offering on December 9th, 2020, with shares priced at $42 per share. However, by December 24th, the stock price had skyrocketed to $161. Unfortunately, things took a turn for the worse from there, resulting in many investors losing significant amounts of money. By the end of 2022, the stock was trading at $11 per share, which represented a drop of over 90% from its peak and a loss of more than 70% from its original IPO price.

At present, C3.ai is trading at a market valuation of $2.8 billion and is projected to have a 2023 revenue of $263 million, which is a marginal increase from the 2022 revenue of $253 million. Given the company’s slow growth trajectory and unprofitability, it is difficult to justify the multiple it is trading at, which is over 10 times its expected revenue for the year 2023.

The return of meme stocks was unexpected, considering the burst of the bubble just a year prior. It seems that lessons have not been learned, as there is little to no basis in fundamentals for the 137% year-to-date rally of C3.ai.

What Happened? AI Arms Race

The introduction of ChatGPT has catalyzed an arms race among the largest technology companies. According to media reports, Microsoft, Alphabet, and Meta are all gearing up to spend more. These three companies are expected to spend an incredible $90 billion in capital in their current fiscal year, according to our calculations using consensus estimates on FactSet.

Over one million users registered for ChatGPT in the first five days after its launch on November 30, 2022, as reported by Greg Brockman, President of OpenAI. The program’s capabilities have sparked a lot of discussion on social media, with users expressing amazement, amusement, and concern.

As reported by NYTimes, ChatGPT’s release prompted Alphabet’s (GOOG) (GOOGL) management to declare a “code red,” indicating a major threat to the company. Some fear that this could be a sign of an impending disruptive technological change that could significantly impact the company’s business. Google’s search engine has been the primary way for people to access the internet for over two decades, but new chatbot technology that could potentially replace traditional search engines could pose a significant threat to Google’s main search business. One executive at Google has described the situation to the NYTimes as a “make or break” for the company’s future.

Microsoft CEO Satya Nadella stated at the World Economic Forum this week that “Every product of Microsoft will have some of the same AI capabilities to completely transform the product,” and tools like ChatGPT are necessary to boost productivity. Microsoft has also obtained an exclusive license to the underlying technology behind GPT-3 in 2020 and has a strong partnership with OpenAI. An update to GPT-3 called GPT-4 is expected to be released as early as 2023 and be significantly more powerful than the current version, according to media reports.

The introduction of ChatGPT has also awakened Meta (META) from its slumber, as employees have recently shared internal memos urging the company to speed up its AI approval process to take advantage of the latest technology. Moreover, it has been reported that Meta is increasingly employing AI to fend up competitors like TikTok.

Taking Advantage of the Hype

C3.ai once again took advantage of a frothy market by issuing a press release on January 30, 2023, announcing the launch of the C3 Generative AI Product Suite with the release of its first product – C3 Generative AI for Enterprise Search. This announcement sent shares soaring as high as 28% on the day.

In the press release, management states, “The C3 Generative AI Product Suite integrates the latest AI capabilities from organizations such as Open AI, Google, and academia, and the most advanced models, such as ChatGPT and GPT-3 into C3 AI’s enterprise AI products.”

Conclusion

It remains uncertain how C3.ai will leverage the advancements made by OpenAI. Furthermore, the partnership between OpenAI and Microsoft raises concerns about potential competition with C3.ai, given Microsoft’s prominent position in the enterprise software market.

The press release about the launch of the C3 Generative AI Product Suite by C3 AI raises questions about the specific technology or capabilities being developed by the company. The statement that the suite will be powered by Open AI, Google, and “academia” doesn’t provide enough information about the licensing agreements in place. Hence, it becomes challenging to gauge the potential revenue increase C3 AI may experience with this new product suite.

While it is not considered a probable outcome based on C3.ai’s past performance, the company has the potential to exceed expectations by disclosing information regarding its strategic partnerships, indicating favorable financial outcomes and a sustained competitive advantage. Additionally, there is a possibility that C3.ai could be acquired due to the substantial interest in the artificial intelligence industry.

Until we have a better understanding of the product’s details, such as pricing and compatibility with C3.ai new consumption model, we remain cautious and refrain from participating in the recent rally, which we believe is driven by high retail interest ahead of earnings.