ChatGPT: The Death Of C3.ai

Seeking Alpha2023-04-21

SummaryGenerative AI will increase competition amongst applications, making it even more difficult for C3.ai to gain traction in an already fragmented market.C3.ai’s revenue concentration through ...

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Comments

RamPillai
2023-04-23
RamPillai
As a AI company might have better prediction on their future. Believe in that?
BitcoinMaxi
2023-04-21
BitcoinMaxi
C3 AI was trading at $10 before ChatGPT hype. Although it is still a good growth stock using AI technology means its in the right track.
Lucky8
2023-04-21
Lucky8
Ok

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The hype will die at some point, but this could take time.da-kukC3.ai (NYSE:AI) is a service heavy machine learning application developer. Its business is highly dependent on customers who want to implement machine learning at scale, but do not have the necessary expertise to do so. While LLMs may appear to be a tailwind on the surface, they could actually represent an existential risk to companies like C3.ai, by increasing the productivity of developers and enabling non-technical employees to develop applications. C3.ai continues to trade on hype rather than substance, leaving the stock at risk of a significant pullback, although this situation could persist for a long-time.The Real Impact of Generative AILLMs are able to write code and provide guidance on writing code, and these capabilities are likely to become increasingly sophisticated over time. These types of tools can be used to improve the productivity of developers or enable workers with little coding ability to develop their own applications. Generative AI is therefore likely to result in a proliferation of applications, developed both internally and by third-party vendors. While this may increase demand, it is also likely to crush prices, undermining the economics for suppliers. This could be particularly problematic for a company like C3.ai that charges customers enormous fees to implement solutions.Figure 1: Potential Impact of Developer Productivity on Application Pricing (source: Created by author)This type of phenomenon is not uncommon within software markets. A technology that causes a paradigm shift often causes market fragmentation, as it is difficult for incumbents to stay on top of developments across market segments. Once the pace of innovation normalizes, leaders are able to consolidate the market through M&A or internal development. It is difficult to consider C3.ai a market leader or incumbent given its lack of traction in the market, but the company stands to lose as LLMs proliferate, along with other companies that are focused on end user applications and low-code / no-code software.C3.ai's Threats and OpportunitiesC3.ai believes that its software can serve as an orchestration system, enabling the company to benefit from innovation in other open source and proprietary software. Management has specifically pointed to functionality like:Machine learningVirtualizationEncryptionManagement has also mentioned products, including:DatabricksSnowflakeVertex AIAmazon SageMakerAzure MLTensorFlowJupyterPythonWhile this could be considered supportive of C3.ai’s adoption in the short-run, it should also raise questions about the value the company actually provides. Longer-term, if these tools become more user friendly and/or AI makes these tools accessible to a broader audience, C3.ai may lose relevance.C3.ai’s management discussed the use of LLMs in search on the third quarter earnings call, which was an interesting insight into how they think about the market. The way management discussed implementing LLMs makes it sound like they have made a fundamental breakthrough in computer science, when in reality it is basically just a user interface over a third-party algorithm and the customer's data. When asked about existing search products on the market, management didn’t even seem to be aware of existing products from companies like Elastic (ESTC). C3.ai’s management team doesn’t even really seem to understand what is the current state of the art technology, and yet are confidently asserting that they are the leaders. Elastic offers vector search and allows customers to embed LLMs in its search product. These types of models are proliferating rapidly, and as training costs decline their availability will only increase. It is difficult to see how any search product can really be differentiated just based on an LLM. It's not even really clear that LLMs give better search results than something like vector search, it is just that the results are presented in a more intuitive manner, albeit with potentially questionable accuracy.On the business side, C3.ai is transitioning to a consumption-based pricing model, which management believes is going well. Response to the change from partners and potential customers has reportedly been enthusiastic. C3.ai reportedly has more than 290 qualified pilot opportunities in its pipeline. The meaning of this metric is somewhat difficult to parse though, as it seems likely that C3.ai is counting each opportunity within a single organization, inflating the number. The conversion of pilot programs to production is also reportedly progressing well, although this is yet to show up in the customer count. This could just be due to the fact that pilot programs have been expansion opportunities within existing customers, or because programs still haven’t matured to the point where C3.ai can count them as customers.C3.ai has also expanded its partner ecosystem, which should help with sales and marketing. C3.ai’s partnership with Google Cloud has yielded a pipeline of 291 enterprise opportunities. C3.ai and AWS are currently pursuing 75 new opportunities, of which 41 appear highly qualified. C3.ai is also working with Azure and has established a strategic relationship with Booz Allen focused on providing solutions to the government defense and intelligence sectors. The DoD is already one of C3.ai’s larger customers, potentially making this relationship important.Baker Hughes (BKR) also continues to be extremely important to C3.ai, contributing 28.9 million USD of related party revenue in the third quarter (approximately 43% of total revenue). There was also a large services contribution (8.6 million USD) from Baker Hughes in the third quarter with extremely high gross margins. Management attributed this to its skilled personnel and complex nature of the work. This seems somewhat strange though, particularly given the transaction was with a related party. 90% margins on services is highly unusual, even for highly skilled and critical services like cybersecurity.Financial AnalysisSimilar to a number of SaaS companies, C3.ai faced market weakness in the middle of 2022, which subsequently eased towards the end of the year and into early 2023. Management optimism has so far not translated to the company’s financial statements, although early guidance for the next financial year suggests a sharp acceleration in growth. Guidance is for fairly flat YoY revenue in the fourth quarter of FY2023 and around 30% revenue growth in FY2024. How much of this acceleration is attributable to headwinds from the business model transition easing versus an improvement in customer demand is unknown.Figure 2: C3.ai Revenue (source: Created by author using data from company reports)C3.ai closed 27 deals during the third quarter, 17 of which were pilot deals under the consumption model. Despite this, the customer count only increased 8% YoY to 236 and was flat in the quarter. Management suggested that some of the new deals were with existing customers and some are trials which are still in the process of shifting into production. One of the primary reasons given by C3.ai for switching to a consumption model was that it would lower the barrier for customer adoption. C3.ai will need to start adding to its customer count significantly if investors are to maintain faith in the company.Figure 3: C3.ai Customers (source: Created by author using data from C3.ai)C3.ai’s gross margins are currently depressed due to the company’s use of pilots and this is expected to carry over into the fourth quarter of FY2023. This is because during the two quarter pilot period, customers receive unlimited run time and premium support resources to ensure the pilot is successful. Gross margins are expected to revert to their historical range as the percentage of pilot customers declines over time.Figure 4: C3.ai Gross Profit Margins (source: Created by author using data from company reports)C3.ai continues to struggle with large operating losses, both due to depressed gross margins and high R&D and sales and marketing expenses. If the transition to a consumption model is successful, C3.ai should start to realize some operating leverage in FY2024, helping to stem losses. Despite this, C3.ai is still likely at least a few years away from GAAP profitability.Figure 5: C3.ai Operating Profit Margins (source: Created by author using data from company reports)Figure 6: C3.ai Operating Expenses (source: Created by author using data from C3.ai)C3.ai job openings suggest that growth remains relatively soft, although it should be noted that C3.ai hired aggressively in 2021 and 2022 and is still growing into its current headcount.Figure 7: C3.ai Job Openings (source: Revealera.com)ValuationFor investors that believe that a large swathe of customers will choose to purchase “AI” applications off the shelf, rather than developing their own, now could be a good entry point into C3.ai. If growth accelerates over the next 12 months and interest rates decline, C3.ai’s valuation could increase substantially. If adoption of C3.ai’s products remains soft, the stock has significant downside though. The stock has been driven by ChatGPT hype over the last three months, which is something that has essentially no bearing on the company’s fundamental value.Figure 8: C3.ai Relative Valuation (source: Created by author using data from Seeking Alpha)This article is written by Richard Durant for reference only. Please note the risks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9944724165,"gmtCreate":1682218163157,"gmtModify":1682221600508,"author":{"id":"4110247617571482","authorId":"4110247617571482","name":"RamPillai","avatar":"https://community-static.tradeup.com/news/a29f022c22b23ba59c95ef339590dd71","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"4110247617571482","authorIdStr":"4110247617571482"},"htmlText":"As a AI company might have better prediction on their future. &nbsp;Believe in that?&nbsp;&nbsp;&nbsp;","listText":"As a AI company might have better prediction on their future. &nbsp;Believe in that?&nbsp;&nbsp;&nbsp;","text":"As a AI company might have better prediction on their future. Believe in that?","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9944724165","repostId":2329746249,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9944702087,"gmtCreate":1682078269250,"gmtModify":1682078273416,"author":{"id":"3575705860283755","authorId":"3575705860283755","name":"BitcoinMaxi","avatar":"https://community-static.tradeup.com/news/e4a0d3f31ab627d7ead179da6e16f516","vip":1,"hat":"https://static.tigerbbs.com/b073a07f77dbe6b3bec6b12311fde6bd","crmLevel":1,"crmLevelSwitch":1,"idStr":"3575705860283755","authorIdStr":"3575705860283755"},"htmlText":"C3 AI was trading at $10 before ChatGPT hype. Although it is still a good growth stock using AI technology means its&nbsp;in the right track.&nbsp;","listText":"C3 AI was trading at $10 before ChatGPT hype. Although it is still a good growth stock using AI technology means its&nbsp;in the right track.&nbsp;","text":"C3 AI was trading at $10 before ChatGPT hype. Although it is still a good growth stock using AI technology means its in the right track.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9944702087","repostId":2329746249,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9944700474,"gmtCreate":1682073353898,"gmtModify":1682073357606,"author":{"id":"3586484744999791","authorId":"3586484744999791","name":"Lucky8","avatar":"https://community-static.tradeup.com/news/c4f8526b82fcfc34fe0a180fd78924be","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3586484744999791","authorIdStr":"3586484744999791"},"htmlText":"Ok","listText":"Ok","text":"Ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9944700474","repostId":2329746249,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":14,"commentSize":3,"repostSize":2,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2329746249"}