AI hype is all over Wall Street now. It has also spread to China, as Baidu (BIDU) plans to release its ChatGPT-esque chatbot in March 2023. For investors unfamiliar with Baidu, it’s commonly known as China’s Google (GOOGL) (GOOG). However, some investors may not be familiar with the company’s AI exploits as China’s leading autonomous driving company. So, Baidu knows AI very well.
It has also driven the shares of AI-first companies in China, much like the recent craze that lifted Nvidia (NVDA) stock. Moreover, with ChatGPT being trained on Nvidia’s industry-leading data center GPUs, the company is primed to benefit significantly as Generative AI adoption becomes more pervasive.
While still early, it’s nearly impossible for investors to ignore the ChatGPT-driven hype, as AI-based startups have reportedly returned to San Francisco’s startup scene. Microsoft’s recent $10B investment (reportedly) in OpenAI implied a valuation of 100x projected sales. If you think the 50x revenue Adobe (ADBE) paid for Figma was crazy in a high-interest rate environment, Microsoft’s valuation suggests it believes the transformative impact of ChatGPT could be enormous.
Before we carry on further and discuss the recent hype driving C3.ai (NYSE:AI) stock higher, investors need to note that C3 has always been an AI-first company.
C3 has turnkey enterprise AI solutions to help customers build their AI applications across different industries, focusing on predictive analytics.
Notably, CEO Tom Siebel believes that company CEOs in the future will need to provide clear, forward-looking insights to their board instead of backward-looking operating performance.
As such, we aren’t surprised that Siebel announced that C3 will integrate ChatGPT into its new product suite, aptly termed “C3 Generative AI Product Suite.”
As part of the initial launch, the company will focus on delivering the Enterprise Search product, which “provides a natural language interface for enterprise users to search, retrieve and present relevant data across all information systems.”
Is this important? Absolutely.
EY Global CTO Nicola Morini Bianzino articulated in a recent commentary that one of the “killer use cases” for ChatGPT could be in enterprise knowledge management.
He articulated that advanced AI models like ChatGPT could transform how knowledge is stored and structured. Accordingly, companies could leverage Generative AI to access and interact with the knowledge that was previously “stored in flat, two-dimensional way.”
As such, Generative AI could compel companies to adopt it rapidly to maintain their competitive edge.
Hence, with the AI hype in vogue now, C3 is astute to capitalize on ChatGPT’s abilities and incorporate advanced AI models into its solutions.
Despite that, investors must remember that C3 is still an unprofitable company. Moreover, the revised consensus estimates suggest that C3 is not expected to report a positive adjusted EBIT margin through FY25 (year ending April 2025).
Moreover, with the switch from a subscription-based to a consumption-based pricing model, its revenue is expected to experience higher volatility, even though it should help to accelerate adoption.
Despite that, we believe there’s a significant level of execution risk implied in an operating model that still needs to prove its profitability, which is not likely a top priority right now for Siebel. He articulated:
I mean I can be profitable this quarter. Okay. I only have one cost. It’s human capital. So I do a big layoff and I’m probably cash positive and profitable that — would that be in the best interest of our shareholders? No freaking way, okay? We’d be trading off future growth to make some analysts or one shareholder happy, okay? (Barclays Global Technology, Media and Telecommunications Conference)
AI has recovered significantly from its December lows, up more than 110% through this week’s highs. The vertical rocket-esque surge also sent AI close to its August highs as investors lifted AI-first stocks.
Is the recovery sustainable? We believe C3 needs to convince us that its new pricing model is sustainable, with a clear path toward profitability.
However, Generative AI packs a lot of promise and could transform C3’s go-to-market momentum if integrated well into its turnkey solutions.
Much depends on how Siebel and his team execute from here.
Still, a pullback is well overdue, coupled with AI’s price action. Hence, investors are urged to avoid joining the hype train now.
Rating: Hold (Reiterated).