Following the release of Chat GPT last year, artificial intelligence has become all the rage among investors. A top priority of many investors has become finding the companies that will most benefit from AI. One of the most obvious examples is a software company called C3 Ai. Ai is in the name and its stock ticker symbol is AI.

The company ipoed in late 2020 at a $4 billion valuation. On the first day of trading, the share price more than doubled, bringing the valuation to almost $10 billion. This valued the company at roughly 60 times its trailing Revenue despite the fact that it was burning cash. Unsurprisingly, the stock price collapsed in 2022 along with the broader Tech bubble.

Yet, following the release of Chat GPT its share price has increased by 140% So what's going on? Does C3 AI have anything to do with chat? GPT Will it somehow benefit from chat? GPT C3 AI was was funded by the software entrepreneur Tom Cyel in 2009, but it wasn't always called C3 AI Up until 2019. Just one year before its IPO it was called C3 Iot. In fact, that wasn't even its first name change. Prior to 2016, it was called C3 Energy and initially focused on making software for so-called smart grids.

So what does C3 do? Do they make software for electric utilities? Do they do something with the Internet of things? Or do they do artificial intelligence? It's hard to keep track of all their name changes in this video. We'll take a deep dive into C3 Ai and see whether or not it can live up to the hype. Keep in mind that this video is not investing advice. Please do your own work and consult with a professional before making any investment decision.

Tom Cyble founded Cyal Systems in the 1990s. Cyal Systems made Customer Relationship Management or CRM software. This was a computer program that allows salespeople to keep track of and store information about their customers among other things. It was a huge success in the late '90s and early 2000s.

In 2005, it was acquired by the Enterprise Software Giant Oracle for $6 billion. This sale made Tom Cyble a billionaire. Around 2008, he thought of a new idea for a new software company. The idea was to create a software for industrial and utility companies to track their carbon emissions.

He named the company C3. At the time, he expected both the US and Europe to implement carbon taxes or C in trade systems for carbon emissions. This would force companies to their carbon emissions. Thus, there would be a huge demand for software solutions to help companies do this.

They created the software and tried selling it in Europe but it ended up being a big flop with underwhelming customer demand. So in the early 2010s, they expanded their offering by making a Smart Grid software platform. Utility companies can connect their various databases to the C3 Energy platform to keep track of how much electricity was being consumed by each customer. Etc This allows them to better optimize their electricity generation and efficiently meet demand.

While while Cyble played this up as a massive opportunity at the time, it turned out to be a relatively niche market. So in 2016, they rebranded to C3 Iot, which stands for Internet of Things. The idea was that factories and other industrial facilities were adding more and more Internet connected sensors onto their equipment. C3 made a software platform that can aggregate this data and do Predictive Analytics For example, they can look at the data from various Internet connected sensors and predict when a piece of equipment is likely to break down or need maintenance.

They created machine learning earning models to make these predictions in 2019. About a year before their IPO, they changed their name yet again to C3 AI. It appears to have been mostly a branding exercise, as their core product offering didn't change much. It appears the main use case of their software remains aggregating various databases to do Predictive Analytics and similar things.

They chose the ticker symbol Ai and they Market themselves as being primarily an AI company. Indeed, they use artificial intelligence to help their customers do predictive maintenance and have been doing this for years. AI became a huge buzzword after the release of Chat Gbt, which can create human-like responses to natural language prompts. When chat GPT was released, investors could immediately see that Generative AI is the future and wanted to find publicly traded companies that would be leaders in this space.

Given that C3 AI had already positioned itself as an AI company, it was in a prime position to benefit from this hype. From both a marketing and investor sentiment perspective, there are many different types of artificial intelligence. Many companies that you wouldn't even think of have been using AI for years. For example, Netflix uses artificial intelligence to predict what movies and shows you're most likely to enjoy based on your previous watch.

History this is AI but it has nothing to do with the type of AI that Powers Chat GPT The widespread adoption of chat GPT has no impact on Netflix's business. Similarly, C3 AI uses machine learning to Crunch large amounts of customer data to predict when industrial equipment needs to be replaced. While this is technically AI, it has absolutely nothing to do with the type of generative AI that Powers Chat. GPT Yet, when Tom Cyble saw the hype around Chat GPT He wasted little time to jump on the bandwagon on January 31st 2023, just 2 months after the launch of Chat GPT they put out a press release announcing a new generative AI product.

Suite They licensed Chat GPT from Open Ai and plugged it into their existing software. According to Tom Cyal, this fundamentally changes the human computer interaction model and will change everything about Enterprise Computing But it's not just Tom Cyel who's excited about this according to retired Lieutenant general. Ed Carden C3's new generative AI product is a game changer for the US Department of Defense representing a technological breakthrough. So who is this? General Ed Carden It turns out he's a paid employee of C3 Aai.

This was not disclosed in the press release. So why did they get one of their own employees to give a testimonial? Why not get one of their customers? Because the product hadn't even been launched yet? Nevertheless, the the company's stock price started to surge as retail investors piled into the stock. In May of 2023, Tom Cyble gave a presentation where he unveiled a new Generative AI product that had been hyped up so much. It appears to be a search engine powered by chat GPT licensed from Open.

AI It allows a user to search for data that they have already integrated into their C3 AI dashboard. It could potentially save you a little bit of time compared to searching for the information manually, but it hardly seems like a great game. Cher And if it really was a game changer, you would expect to see it show up on their financial performance. In the quarter ended July 31st, 2023, which was their first quarter.

After releasing their generative AI solution, their revenue actually declined slightly compared to the prior quarter. their operating loss expanded to a record 74 million. Far from being a game changer, the new Generative AI product seems to have had negligible if any, impact on their revenue. Another point of concern is that even as their revenue is increased in the 2 years after they went public, their operating losses have also exploded.

In the past. Cyal would tout the company's high gross margins as evidence that the business would eventually become profitable. Here's him telling: Mad Money Jim Kramer about the company's path to profitability in July of last year are people who are had never done what you've accomplished but we have investors who are saying look, I'm in this thing I I Know Seil is bankable I want to see right now this year that he can't make a lot of money for me I think we need to look at is the addressable Market opportunity and for me to throw this into Cash positive business in 90 days, which I could do right would be not in the best interest of the shareholders and not in the best interest of our customers. We have a clear path to profitability.

Uh, okay. in the next you know, let's say uh, six quarters. Okay where we basically reduce our marketing expenses from 29% of Revenue to 11. Nobody spends 29% of of Revenue on marketing all R&D expenses to M establish technology leadership have been 44% of Revenue Goodness Jim Nobody spends 44% No.

I agree I Look, according to Cyble, if he wanted to, he could cut costs and make the company profitable within 90 days. but they're investing in research, development and marketing in an effort to grow. Revenue Eventually, their revenue will grow and their operating expenses will decrease as a percentage of Revenue. But the opposite has happened.

since the company went public. their operating expens have grown as a percentage of Revenue in the most recent quarter General and administrative expense is 27% of Revenue. Sales and marketing is 61% of Revenue and research and development is a staggering 70% of Revenue. Yet, despite the massive spending on sales and marketing, the company's Revenue has actually declined.

This begs two questions: Firstly, why was their generative AI tool such a flop? and secondly, why are they losing so much money despite posting very high gross margins? C3 Ai's customers are from from a wide range of Industries It can be a very complicated process to connect the thousands of data sources within a company to C3 Ai's platform. In some cases, C3 AI needs to make new versions of the software specifically for a new customer or industry vertical. They advertise that they have 40 different TurnKey applications to meet the needs of their customers. These were very expensive to develop.

As they broaden their customer base, they will need to continue investing heavily to make ever more applications. This goes to their extraordinarily High Research and development costs R&D expense includes development of features and modules created through prioritized Engineering Services purchased by customers where the company retains the intellectual property. Normally, when you think about research and development, you think of researchers developing a new product that will eventually be mass-produced The research and development can be thought of like a one-time expense. C3's customers are diverse and their specific needs are often unique.

It appears that in many cases C3 needs to expend significant research and development efforts to make a new version of the software that that works specifically for one or a handful of customers. C3 does own the intellectual property rights for these new versions of the software, but it's unclear how valuable they are. The software is custom tailored for a specific customer and may not be applicable to new customers going forward. This blurring of the lines between research and development and cost of goods sold could explain why the company's R&D expense has increased substantially as a percentage of Revenue.

Even as Revenue has grown, it also calls into question their path to profitability. If there R&D expense continues to remain at a relatively constant percentage of Revenue, it's hard to tell how they could ever become profitable. The next issue is the fact that their revenue growth has flatlined and even turned negative in the most recent quarter. This is despite them rolling out the chat GPT plugin, which Tom Cyal hailed as a great game changer.

The reality is C3 AI solution is expensive, difficult to use, and only fulfills Niche use cases. There are many competitors including paler data, bricks and snowflake who can all pretty much do the same thing aggregate the data within an Enterprise and run machine learning models. The C3 AI generative AI tool is nothing special. they just licens chat GPT from Open AI Many software companies are doing this now.

For example, Snowflake has something called Snowflake Co-pilot which is very similar. Anyone can license an AI chat bot from Open AI Google or others so it's not a differentiator. Recently, there have been a few signs that C3 AI is having difficulty: Landing new customers. In 2019, they created a joint venture with the Oilfield Services Company Baker Hughes.

As part of the deal, Baker Hughes gained the right to act as a sales agent for C3 AI in the energy sector. When they first struck the deal, Baker Hughes committed to minimum annual revenue guarantees. For example, if Baker Hughes failed to sell $100 million of C3 Ai's product in 2021, they would have to pay the difference to C3 AI. They've renegotiated the deal twice, both times decreasing the minimum Revenue guarantees.

This indicates that Baker Hughes has struggled to sell C3a Ai's products. Another point of concern is a strategic partnership they have with Google In September of 2021, C3 AI proudly announced a strategic alliance with Google whereby C3 Ai's products are integrated with Google Cloud and Google salespeople co-sell C3 Ai's products to Enterprise customers. This looked like it was hugely positive for C3 AI Interestingly, in August of 2021, just a few days before the Google Cloud partnership was announced, C3 Aai signed a $13 million lease for a new headquarters Bill building. The landlord was a company called Dwfi 1400 1500 Seport Boulevard LLC The address of this building is 1400 Seport Boulevard Redwood City California This building is right next to a massive Google office building DWF I400 1500 Seport Boulevard LLC appears to be a company owned by Google A man named David Radcliffe signed off on the lease representing the landlord according to his LinkedIn profile.

He was a Vice President of Real Estate for Google at the the time. So C3 AI agrees to pay $100 million of rent to Google and then a few days later they announced a strategic partnership. Was this a coincidence? C3 AI likes to portray itself as a leader in Ai and a beneficiary of all the hype surrounding chat GPT But the type of AI that they do is very different and the disastrous Financial results speak for themselves. Tom Cyel makes frequent appearances on cable television, hyping up the prospects of his company and building a substantial following amongst retail investors.

At the same same time, he's dumped $600 Million worth of his personal holding. since the IPO Eventually, the current investor Euphoria around all things AI will die down. C3 AI may be remembered in the history books as just another stock promotion. All right guys that wraps it up for this video.

what do you think about C3 AI Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.