Why the hype may have gotten out of hand

C3 AI (AI) has been on a tear in the public markets this year, up a staggering 260% year to date. So you might think that Wall Street would be all gung-ho on the artificial intelligence specialty firm headed up by the legendary Tom Siebel, known for founding and selling the software company, Siebel Systems.

Not so fast.

Despite the soaring stock price and famous CEO-founder, tech analysts have worries about the 14-year-old company that range from the way its executives count customers to its churning of CFOs.

But you can also see why the company has a lot of fans. In 2022, when the AI boom kicked off, C3’s shares soared, sending the company’s market cap careening above $4 billion as bullish investors made the case that the company was indeed an enterprise AI leader. (They do, after all, have that prized ticker, AI.)

In fiscal fourth quarter 2023, C3 generated $72.4 million, primarily from subscription revenue, and reported 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 asked analysts and short-sellers on both sides to weigh in.

The bear case

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

“Subscription revenue has been essentially flat quarterly over the past three or four quarters, and, while they’re rapidly improving profitability, they’re still burning money,” said Kingsley Crane, Canaccord Genuity senior analyst. “So when you look at revenue, growth, and profitability… it’s in the bottom quartile for software companies in the public markets.”

He added: “I’ve said it before, but I think the fundamentals of C3 don’t necessarily align with the movement and its price, though that’s true for a lot of companies.”

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How C3 counts its customers, which has changed over time, is particularly vexing.

“Get the customer straight,” said Ben Axler, Spruce Point Capital Management founder and CIO, in a June interview with Yahoo Finance Live. “We’ve now seen multiple revisions about what they claim to be their customers. … If I can’t get confidence in the customer [numbers], I can’t get confidence in the revenue.”

The filing that Axler, who’s shorting the stock, is referring to includes a section that states that, in its customer count, the company includes “products and services including paid trials, one-time, subscription, and professional service offerings.”

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

“For example,” he continued, “if they’re doing business with Shell in three or four different divisions, that would be, by their count, three to four customers and one customer entity. So the real number of customers — what we typically think of as a customer entity — I would say is likely below 100.”

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

The customer count may indicate another problem: There’s just not enough business yet. Sahm Adrangi, Kerrisdale Capital Management founder, who is also shorting the stock, said: “If this company does have a competitive product, why has customer count remained relatively flat?”

Additionally, C3 has seen massive turnover in its CFO role. Since 2019, C3 has had four CFOs, and that’s a lot. Since 2019, less than 10% of US public companies with a market cap of $1 billion-plus have had turnover in the CFO position, according to data from Bedrock AI.

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

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

The bull case

First of all, in case you haven’t noticed, C3 is in a hot market.

D.A. Davidson senior software analyst Gil Luria said: “C3 has built a business that should reach $300 million this year around applications of machine learnings and predictive artificial intelligence, which makes the company one of the biggest providers of enterprise AI, and one of the first pure plays in that space.”

To Siebel, the prospective size of the AI market is key to C3’s growth potential.

“Generative AI alone exceeds, I think, $1.2 billion,” he said. “If we look at enterprise AI … even without generative AI, the predictions are a $500 [billion], $600 [billion], $700 billion addressable market opportunity. So this is as big a market opportunity as I think we’ve seen.”

But what about the customers? Davidson’s Luria thinks C3’s customer count is lagging behind because, as an enterprise company, it has a long sales cycle coupled with long-term contracts.

Stanford Graduate School of Business lecturer 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 indeed be limited — though that’s not necessarily a bad thing.

“They appear to be strongest with large complex industrial customers who have tremendously large data sets and who are not digitally native,” said Siegel. “Does that limit their customer base? Perhaps in the number of customers … but not necessarily in terms of the size of the opportunities.”

Constellation Research founder R “Ray” Wang added that there’s yet another way to look at C3’s growth.

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

When it comes to the shifting accounting of these customers, Siebel said: “The company has evolved over the last 14 years, the customers mix has changed very significantly … and we’ve continued to do our best to provide the market as accurately as we can or representation of the number of customers that we have.”

The bottom line

No matter what the bears say, for the time being, C3’s stock seems to be on a relentless climb. How does that line up with the fundamentals?

Adrangi makes the case that we should be looking for rates more akin to Palantir’s (PLTR) growth metrics. Some numbers to consider: In 2022, Palantir’s revenue spiked 24% year over year to $1.91 billion. C3’s last fiscal year revenue (2023, reported in May) was $266.8 million, a spike of 5.6% compared to the prior year.

But that growth just isn’t totally there yet. That said, AI is nascent — and C3 is helping lead the charge. Getting these enterprise AI products to work, for all the bluster we’re hearing about them, is exceedingly difficult and requires a lot of elbow grease before the product is fully running and scalable, according to Tola Capital Partner Aaron Fleishman.

So are the bulls or bears right? If you have to pick a side, who do you roll with? Ultimately, the decision is based on how much you buy into the AI hype — and Siebel, who has a heck of a track record.

For his part at least, the opportunity is clear.

“I think that any investor taking a short on the AI thesis in 2023 is like betting against the Internet in 1996,” Siebel told Yahoo Finance.

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

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