C3.ai: Pity the Fool Who Owned It in 2021

C3.ai (NYSE:AI) stock has had a miserable 2021. Shares that started the year trading at $131 per share are ending it near $33 per share. For those scoring at home, that’s a 75% drop.

A man examines a digital screen with different icons for software.

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Despite this, there are analysts who say you should buy it. The shares rose nearly 5% on Dec.9 after what was called a “$500 million agreement” with the Department of Defense (DoD).

This could be the catalyst that makes C3.ai’s AI enterprise software worthwhile. Or it could be another head fake.

The Bull Case

The bull case for this stock starts with C3.ai’s CEO, Thomas Siebel.  Technologists will find the name familiar. He previously launched Siebel Systems, a database application company sold to Oracle (NYSE:ORCL) in 2006 for $5.8 billion. His 2019 book Digital Transformation: Survive and Thrive in an Era of Mass Extinction  was briefly a Wall Street Journal best-seller.

Bulls insist the fall is temporary. They note that the ARK Innovation (NYSEARCA:ARKK) exchange traded fund (ETF) is down 40% from its high, that small tech growth is just out of favor.  C3.ai expects revenues of nearly $250 million this year, which is compound annual growth of 39%. The customer count has risen by 89% per year and stood at 104 at the end of the company’s second quarter.

C3.ai’s fiscal year ends in April, so October was the end of the second quarter for its fiscal year. The company recorded a net loss of $56.7 million, 55 cents per share, on revenue of $58.6 million. It claimed a gross profit of $42 million, but put $36 million into research and development, and almost $43 million into marketing.  The marketing budget more than doubled.

The money is going into ads saying C3.ai is “solving unsolvable problems” and pushing digital transformation as a matter of survival.

Needham analyst Jack Andrews has a buy rating on the stock, although he recently lowered his price target from $122 to $103 per share. But even its 2021 fall hasn’t made C3.ai a truly cheap stock. Its market cap entering trade Dec. 13 was $3.5 billion, seven times its revenue.

The Bear Case

The bear case starts with C3.ai’s success. Most of its customers today are oil companies.  Oil tools company Baker Hughes (NYSE:BKR) is building out an enterprise suite of its own with C3 software, called BHC3.AI, and pushing it to oil exploration companies. The oil and gas industry represents 35% of the company’s revenue.

Then there’s that DoD contract, which isn’t really a contract at all. It’s more like a five-year plan, allowing any DoD agency to quickly get the software for modeling and simulation.

The bears argue that AI is one of those technologies that has been around for decades but hasn’t really caught on. The oil industry is going away, and the DoD will buy anything. Siebel and C3.ai could be out way ahead of their skis, headed for a hard fall in deep snow.

The Bottom Line on AI Stock

This is a tough call.

It’s hard to argue against Tom Siebel, an experienced futurist with a net worth of $3.8 billion. If Siebel can succeed in a few more industry targets like health care, manufacturing, and financial services, the stock could zoom.

On the other hand, Siebel himself recently dumped 600,000 shares, worth about $30 million, when the stock was near its present price. He doesn’t need the money. He’s getting paid $5.6 million a year. Additionally, the 600,000 shares are out of 105.4 million shares outstanding. It’s not a huge sale.

If you’re a technology investor with sporting blood, now is a good time to buy C3.ai. Just be prepared to wait for a return and know you could lose your stake.

On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He also is a futurist, author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.

 


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