We are short shares of C3.ai (AI), a $4 billion market capitalization enterprise software company that has risen from the ashes of its busted IPO based on the misconception that its self-proclaimed “AI leadership” somehow positions it to benefit from Silicon Valley’s current tech theme du jour: generative AI as represented by media obsession ChatGPT. We believe these speculative flames won’t burn bright much longer, as the realities of C3’s poor customer traction, failing sales partnerships, and financial pressures will catalyze what is likely to be a painful reality check.

This isn’t the first time C3 has sought to ride a hot investment theme. The company was originally founded as C3 Energy to develop analytics solutions for public utilities preparing for the emergence of cap-and-trade and smart grids. C3 pivoted in 2016, renaming the company C3 IoT to capitalize on that buzzy opportunity. But management’s master stroke was rebranding operations as C3.ai in 2019 and going public with the “AI” stock ticker, thus securing its place as the default artificial intelligence stock play for the undiscriminating investor despite the bulk of its business coming from relatively dated analytics models built for a very small number of utility, energy, and government customers. C3 is a minor, cash-burning consulting and services business masquerading as a software company, and its true value is a fraction of its current market capitalization.

Generative AI will do nothing to change the business or financial trajectory of C3 any time soon, yet C3 faces numerous, more serious near-term challenges. The company sells an expensive, trailing edge, and difficult to implement solution that is losing out to a plethora of alternative solutions. To make matters worse, C3’s go-to-market motion seems to be completely broken. Excessive salesforce turnover suggests fundamental leadership issues, and the company’s marquee sales partnership, with energy services giant Baker Hughes, seems to be falling apart. Furthermore, we believe C3’s cloud partners, Microsoft, AWS, and Google, are more foe than friend. Thus, while C3 has done its best to obfuscate the facts, the company’s track record of new customer acquisition is shockingly poor. Management has used recent pricing changes and accounting tricks to distract the market from the company’s deteriorating results, but all signs point to a further weakening of fundamentals ahead.

C3 was egregiously overvalued even before its shares caught the generative AI hype wave, which added an unjustified $2 billion to its market capitalization in just a few short weeks. Shares should return from whence they came, approximately $12 per share, or almost 60% below current levels. The company’s high mix of lower margin professional services, challenged growth, and industry worst cash flow profile suggests the downside could be even greater. We find little about C3.ai intelligent, but plenty artificial.

Read our full report here.