Why C3.ai is a risky but must watch investment!

31 Jan Why C3.ai is a Risky But Must Watch Investment!

Posted at 10:27h in Technologies by admin 0 Comments

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C3.ai, Inc. (NYSE: AI) is a leading provider of enterprise software that enables digital transformation and building of enterprise-scale AI applications. The Company offers prebuilt, configurable, high-value AI applications that can be utilized in varied industries and areas such as energy management, customer management, supply network optimization among others.

C3.ai, Inc. (NYSE: AI)

Market Cap: $2.45B; Current Share Price: 23.33 USD
Data by YCharts

Strength
The Company’s AI software offerings includes C3 AI Suite, a platform that enables rapid deployment and operation of enterprise AI operations. The model driven architecture integrates a development studio, data integration, AI/ML model development, operations and security services and enables companies to develop cloud-native on-premise applications that can be seamlessly integrated with existing infrastructure. The suite works in harmony with major cloud infrastructure and service providers such as Microsoft Azure, AWS Services, Google Cloud Services, NVIDIA among others.

C3 AI Applications provide prebuilt SaaS platform applications for high-value use cases with featured applications such as energy management, anti-money laundering, inventory optimization and reliability to name a few.

C3 AI Ex Machina allows anyone to develop and scale AI models without the need for writing codes, by simply using a drag and drop interface, and can be scaled from 4GB to PB+ with a pay for use option. C3 AI Data Vision provides valuable knowledge and insights using advanced network and temporal analytics and an interactive interface for use in intelligence analysis, vendor tracking, metadata exploration to name a few. The Company also offers CRM solutions through C3 AI CRM which aids in accurate forecasts, valuable insights and improvements in churn, upsell/cross-sell and productivity.

C3.AI serves companies in the financial services, government, manufacturing, oil and gas, public sector and utilities space and has over 4,800,000 AI models in use that deliver 1,700,000,000 predictions every day.

The Company’s clients include prominent Fortune 500 companies such as Shell, FIS, Bakers and Hughes, Cargill, Johnson Controls, Duke Energy, besides government entities like the U.S Department of Defense, Missile Defense Energy and the U.S Army.

As per its Q2,2022 financial results, the Company’s revenue increased by 41% YoY to reach $58.3 million, while subscription revenue grew by 32% to reach $47.4 million. Gross profit grew by 35 percent at $42.3 million. The subscription revenue constituted $47.4 million or 81% of the total revenue, while professional services revenue brought in $10.9 million or 19 % of the total revenue.

Image Source: Company

Revenue guidance for Q3,2022 pegs the revenue at $66 – $68 million, YoY growth at 34-38% and the Non-GAAP Loss from Operations at ($30) – ($26) million. The estimates for financial year 2022 expect the total revenue to be $248 – $251 million, YoY growth to be 35%-37% and the Non-GAAP Loss from Operations to be at ($108) – ($100) million.

Weakness
On December 2 2021, the Company’s stock reached an all-time low after posting second quarter results. The Company’s faced headwinds in 2021, as the COVID-19 pandemic led to disruption in orders from customers in the industrial, energy and finance space. However, it was able to rebound in the first half of fiscal 2022 due to improvements in the sale process as attributed by CEO Thomas Siebel.

The Company’s sales team was made into an independent unit in July,2021 which led to issues that had an impact on the second quarter sales performance. The management was quick to reverse the changes to the original sales model, which has resulted in business picking up in the third quarter of 2022.

In the words of Thomas M. Siebel, Chief Executive,

“Now, historically, C3.ai has relied upon a high-touch white glove service — strategic selling model to acquire and retain customers. In July of 2021, in an attempt to further accelerate revenue scalability and customer adoption, we reorganized sales as an independent unit along the of traditional, hierarchically regimented selling structures like those in place at SAP and IBM. That proved to be a mistake.”While the revenue attainment in the quarter was strong, the overall performance of the sales organization and specifically new sales activity in the second quarter was unacceptable.”

In December 2021, the Company’s Chief Financial Officer David Barter was replaced by Adeel Manzoor, who joined the company as senior vice president and chief administrative officer. The resignation was due to personal reasons; however, it is likely to raise questions in the investor community.

C3.ai’s customer concentration is another cause for concern as nearly 37% of its revenue comes from two major customers namely Baker Hughes and Engie.

Opportunity
Artificial Intelligence is witnessing burgeoning demand and gaining wide scale acceptance owing to the humongous amount of data being generated by new age organizations. There is a growing need for tools that enable advanced data interpretation, and offer valuable insights, that can be used for serving both internal as well as external customers better. According to a report by Markets and Markets, the artificial intelligence as a service market is expected to reach USD 10.88 Billion by 2023, growing at a CAGR of 48.2%, from USD 1.13 Billion in 2017.

Innovative AI powered solutions are making their way into the service industry, to address the demand for software tools and services that use machine learning, deep learning, and natural language processing [NLP]. The application of these novel solutions is to be found in various industries such as agriculture, manufacturing, banking, transportation, healthcare, insurance, telecommunication, defense and government functioning. The emergence of Application Programming Interface (API) and Software Development Kit (SDK) and growing number of innovative startups will propel the growth in the industry according to the report.

AI powered service solutions can create better customer experiences as they eliminate the need for long wait times, human errors and the solutions offered are mostly preemptive and quick in nature. This can help improve customer loyalty and brand reputation as well. In fact the conversational AI market size is estimated to be worth over USD 15.7 billion by 2024, growing at a CAGR of 30.2%, from USD 4.2 billion in 2019 according to a report.

However, as the adoption of AI is still in its nascent stage, the prohibitive costs of design, implementation and customization as well government and regulatory hurdles may hamper the growth in the market and act an impediment for the industry from reaching its full potential.

Threats
Technology is a constantly evolving field. A breakthrough innovation of today can easily become outdated in a matter of years. To sustain in such a highly competitive environment, companies need to constantly be one step ahead of the competitors in research and development and delivering highly differentiated experiences for their customers.

There is a possibility of a new and better technology emerging in the market, which may render the Company’s technology obsolete. Customers may opt to go with its competitors for their business needs and the Company may fail to acquire new customers or not be able to achieve its targeted growth.

Customer Concentration is another issue, as nearly 37% of its revenue comes from two major customers namely Baker Hughes and Engie. In Q1 2021, two customers accounted for 23 percent and 13 percent of revenue, while three customers had 23 percent, 17 percent, and 15 percent of accounts receivable. This concentration may become a problem, if even one of the customers decides to terminate the relationship with the Company.

Key Takeaways

The Company has expanded its relationship with Baker Hughes Co, increasing the contract value by $45 million to $495 million, revising its term to 6 years from five, with an assurance of minimum $357 million of revenue over the next 3.5 years. The Companies had originally formed a joint venture in June 2019 for marketing and deploying C3.ai’s AI technology into oil and gas businesses. The restructured deal enables the company to obtain a guaranteed revenue and realign their sales efforts.

ai’s Remaining Performance Obligations (RPO) increased by 74% YOY to reach $529.3 million on a non-GAAP basis which indicates that the business is growing, however there are concerns that the new business is entirely driven by the expansion of contract with Baker Hughes.

The Company is helmed by an experienced management team with the founder Tom Siebel having previous experience working for oracle and founding Siebel Systems. This experience will prove valuable in handling the challenges posed by a burgeoning market.

SaaS (Software-as-a-service) is making inroads and revolutionizing the idea of how business is conducted. Information storage and access remains a very crucial requirement for the success of any entity, hence the need for a faster, convenient and cost-effective solution is the need of the hour. This is especially true in case of utilities management as data that they generate is humongous. According to a report by Fortune business insights, the global SaaS market size is expected to reach $716.52 billion by 2028, growing at a CAGR of 27.5% from $130.69 billion in 2021.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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References

https://c3.ai/c3-ai-suite/deployment-options/

https://s26.q4cdn.com/925837691/files/doc_downloads/2021/Q2-Earnings-Final-Deck.pdf

https://c3.ai/baker-hughes-and-c3-ai-announce-joint-venture-to-deliver-ai-solutions/

https://www.fool.com/earnings/call-transcripts/2021/12/02/ai-q2-2022-earnings-call-transcript/

https://www.fortunebusinessinsights.com/software-as-a-service-saas-market-102222#:~:text=The%20global%20software%20as%20a,during%20the%202021%2D2028%20period.