C3.ai (NYSE:AI) has had a seriously underwhelming 2021; AI stock has dropped more than 60% year-to-date. That said, most of the damage was done in the spring, when shares tumbled from $120 to $50. Since then, AI stock has moved in a trading range as investors wait for new developments from the firm to reset the narrative.
Over the past couple of weeks, however, AI stock has started to show some signs of life; shares have advanced from $44 to $52. We’ll get to why sentiment is turning in a moment. However, first, it’s worth understanding the company’s founder and CEO, Tom Siebel, and how he has positioned C3.ai for success.
A Bet on the Jockey
There’s an investing idea called betting on the jockey. In a newly-emerging industry, it can be hard to handicap which of the companies has the best technology. Everything is evolving so quickly in artificial intelligence (AI) right now. So instead of making a thesis based on the best software today, instead you pick the best management team. Don’t bet the horse, bet on the person riding the horse.
Tom Siebel is the perfect person to be leading C3.ai right now. Siebel graduated from the University of Illinois with his graduate work in databases, and immediately went to work for Oracle (NASDAQ:ORCL) in the early 1980s. At the time, no one had any idea Oracle would end up being the behemoth that it later became; Siebel was among Oracle’s first two dozen employees.
Siebel worked at Oracle for a decade and helped make them one of the global leaders in databases. However, Siebel wanted to launch a database program focused on sales. Oracle wasn’t sold on the idea. So Siebel set out on his own, founding Siebel Systems. Siebel was the first big player in what is now known as customer relations management (CRM) software. This was one of the fastest-growing application software companies of all time; Siebel founded it in 1993 and by 2000 it was doing $2 billion a year in revenues.
Ultimately, Oracle realized the error of its ways in letting Siebel leave. Oracle ended up having to acquire Siebel Systems for $5.8 billion. After that, Siebel founded his next company: C3.ai.
Building the AI Industry
After Siebel left Siebel Systems, he took time to think about the next big opportunity. He had practically invented the CRM niche, and Siebel Systems remained the industry leader there at the time of its sale to Oracle. He concluded that artificial intelligence would be the next big thing, and C3.ai came into existence.
Initially, C3.ai focused on industrial enterprise AI applications in specific fields such as energy. Over time, however, C3.ai has broadened its platform. The company is now the global leader in providing Enterprise AI. It has 40 different applications for industries spanning manufacturing, telecommunications, utilities, and aerospace in addition to the company’s original oil and gas niche.
Why This Matters Now
This sort of big data analysis and optimization is absolutely essential going forward. Just look at the supply chain crisis now. Companies can’t even guarantee that they’ll get basic inputs for their factories. As such, it’s increasingly vital to use existing resources to their fullest. Any sort of software that can reduce waste and improve throughput is more crucial than ever.
That’s not all. The focus on environmental, social, and governance (ESG) investing has put efficiency in the forefront. Companies need to reduce their carbon footprints to remain on the right side with investors. Industries such as chemicals, refining, and manufacturing use tremendous amounts of energy and potentially toxic compounds. To the extent that AI and intelligent software can optimize these processes, it makes a big difference in mitigating a dirty industry’s environmental impact.
AI Stock Verdict
C3.ai has had a difficult 2021. This came in big part because of Covid-19. C3.ai on average has huge contracts with clients; think millions of dollars each on many occasions. The contract with Baker Hughes (NYSE:BKR), for example, is for hundreds of millions of dollars just on its own. This isn’t the sort of software that a business would order over a video call during the pandemic.
C3.ai, understandably, had a sales slowdown given that its sales people couldn’t travel to pitch the product in-person. That should start to lift soon, as things return toward normal. That said, C3.ai has been slower in announcing new contracts this year than analysts had hoped for. If that persists, it will be a negative for the growth story going forward.
Still, Tom Siebel has navigated other big industry busts, such as the hangover following the 1999 tech bubble. There’s no reason to think that he can’t get C3.ai back into a hypergrowth phase once the current disruption ends. In the meantime, AI stock has a noteworthy 13% short interest right now. That could set off a major squeeze on positive earnings or any big new contract announcements.
On the date of publication, Ian Bezek held a long position in AI stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
