Enrique Abeyta has a new ad “presentation” out for his Empire Elite Growth ($2,000/yr, no refunds), and Gumshoe readers are asking us about what he calls the “#1 ChatGPT Stock for 2023” … so let’s dig in and get some answers for you.

Here’s a little taste of the pitch…

“Get Rich from the Fastest-Growing Tech in History

“In the short span of three months, ChatGPT has become the fastest-growing technology ever…

“In fact, in just under two months since it was launched, this tech has gained 100 million active monthly users.

“That dizzying pace of rapid adoption makes it the fastest-growing technology in history…”

And he includes some comparisons that really catch the eye:

“Growing 24 times faster than Facebook, which has gone on to deliver 1,490% returns since its IPO…

“Skyrocketing 12 times faster than Instagram, which grew from $0 to a $1 billion valuation, making insiders rich…

“Speeding six times faster than Google, which has over 1 billion users who use it 99,000 times every second…

“And exploding over four times faster than TikTok, which is now valued at nearly $60 billion…

“It erased $100 billion of value from one of the world’s most important companies in just one day…

“It’s helped create the most valuable startups that went from $0 to $29 billion valuation in a matter of weeks.”

“AI” really is one of the more compelling “story” ideas out there… it’s got huge but still undefined potential, it’s obviously disruptive, and, perhaps most importantly, most investors don’t really know what it is, so everyone can claim a piece of it. And this latest version of AI, particularly the generative AI that can write essays or create images using simple text prompts, is quite new (at least in any useful form), and largely either used internally by companies, or pre-commercial as a product, so despite the booming interest, there aren’t many “pure play” stocks to buy if you want to ride the wave of artificial intelligence enthusiasm.

It might be the next “platform,” which really means the next big idea on which lots of unexpected businesses can be built (personal computers, the internet, smartphones) … but it’s so early that we can’t know which uses will be most important (who thought mobile phones would explode as a platform after people stopped using them as telephones?), and can’t know which companies are the next Alta Vista or Gateway Computer, destined to burn out fast, and which might be the next world-dominating company like Alphabet or Microsoft. Who knows, maybe it will even be Alphabet and Microsoft that end up leading this sector, again, or one of the other giants like Meta or Apple, they have certainly invested hundreds of millions of dollars in building AI systems in the past decade, and they may end up being big enough to stifle innovation and disruption again… but there’s always hope that the old leaders will get soft and slow, and a new leader will emerge.

The popular narrative is that this is what’s happening at Alphabet right now, with word that Samsung might drop Google search as the default in their Galaxy phones in favor of Microsoft’s Bing, something that would never have happened before ChatGPT embarrassed Google and lifted Microsoft (we recall that until Microsoft poured billions into OpenAI and partnered with them on including ChatGPT responses in Bing, just a couple months ago, Bing was an also-ran search engine that only your grandmother used, and she did so only because it came as the default on her computer). It’s awfully early to make judgements about who “wins” in a big new product area, of course, but narrative and the “next big thing” can spread like wildfire — I vividly remember when Google was first launched, I was in graduate school and studying information science, and it’s hard to explain just how incredible and useful it was compared to the previous generation of search engines we had all gotten used to. Light bulbs came on over noggins everywhere, and word spread, and before you knew it Yahoo, the previous giant, was old news and an embarrassing afterthought.

It took a couple years to go from that to creating the business plan that really launched the Google/Alphabet we know today, it was the hugely lucrative ad-auction platform that really changed the internet forever and turned them from a strange company that nobody really knew how to value at their IPO in 2004 (they went public at a $15 billion valuation, which was widely seen as “too expensive”), into a global leader and one of the foundational companies of the internet, with a valuation that tickled $2 trillion before the downturn last year. That kind of success story is part of the reason why we should always hold a little space for some “disruptors” in our portfolios — though, to be fair, Google was already wildly popular and profitable by the time they went public (they had a PE of about 80 at their IPO), it’s just that investors had a hard time imagining the wild revenue growth to come, and the potential scale of their profitability.

Google is still doing just fine, of course, they make tons of cash and those early investors enjoyed a 9,000% return if they’re still holding on (I didn’t buy shares until about six months after that, sadly, so my first buy is only up about 2,000%), but who knows, Yahoo was seen as unstoppable for a while, too, maybe they’ll be the next unstoppable technology leader to be supplanted by OpenAI or whoever the “next Google” happens to be. I’m not selling my GOOG shares, they’re reasonably valued and I think it’s likely that the narrative will change as Google puts its own decades of AI investment and research to work and “catches up,” but thought I should briefly share that viewpoint.

If you want a good overview about Artificial Intelligence, or perhaps a reason to start hyperventilating with excitement, check out a couple episodes of the Invest Like the Best podcast — first, the overview of the economic impact of AI with Avi Goldfarb, and second, the interview of Doug Leone from Venture Capital giant Sequoia Capital, who seems excited about the massive platform potential of artificial intelligence investments.

That interview with Doug Leone isn’t really about AI, to be fair, that was just a small snippet of the talk, but I think this segment frames the opportunity and risk pretty nicely — particularly because AI as an investment theme is exploding so dramatically right now in the venture capital market, but doesn’t yet have much of a real presence in the public markets.

“I actually think that AI is the next platform shift in the same way that mobile was the one before, Internet was the one before, infrastructure, the hardware-software layers that allow the Internet to be overlaid over that. So I think, AI is real. But I said earlier, we are going to overestimate it in the short term. We’re going to invest in everything in the same way that in 1999, we invested in everything. But then Google came out of that or Facebook came out of that.

“So I think you have to have a good head on your shoulder, where you don’t practice FOMO, where you don’t chase every company and you make the investments that you think are appropriate where if it doesn’t make sense to you, a lot of things don’t make sense and you see every 5 venture firms wanting to invest. And the thought process, if you’re a young investor said, “Well, I don’t really get it, but they get it must be great. Let me go in.” And there’s a lot of that, believe it or not. I think one of the benefits have been around for 50 years is that while to, we have the fear or FOMO, of course, we do, right? We’re humans.

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“We have a little more perspective of how deep to jump in. AI is real. AI is the next platform, but how do we not invest in everything that walks? …

“Now we’ve drank our load of Kool-Aid, whether it’s 1998 or 2018, 2019. But in both cases, I’m happy to report, we drank a carafe of Kool-Aid, not a garbage can full of Kool-Aid. So of course, you’re going to drink Kool-Aid because it’s a private investment business. It’s a 60-40 type of business. We too got caught a little bit in momentum investing, but I’m proud to say that by comparison, it’s not even close to some of the things we’ve seen in the background. “

That’s a pretty reasonable way to think about it, even if, as a venture investor, he’s coming from what should be a much more prospective and speculative mindset — he’s funding companies that are in some cases not much more than a business model and a charismatic founder, so he has to go in assuming that more than half of Sequoia’s early stage venture investments will be total failures (I’d say 80-90%, but that might be too harsh). As investors, we probably don’t have quite that level of risk tolerance… but we also have the benefit of only working in the public markets, with companies that have actual financials and maybe analyst coverage and some established history of making sales, at least, even if they’re not making profits.

Enough background, though, let’s get to the tease…

Abeyta gets into the details, and begins teasing the one stock he likes most in what he’s calling “The ChatGPT Space”:

“The Single Stock in the ChatGPT Space I Would Bet My Retirement On

“Right now, Microsoft, Google, Meta Platforms, Taiwan Semiconductor, and more are pouring billions to be at the forefront of ChatGPT technology…

“They are all great stocks. But odds are, they are not going up 5x or 10x in my lifetime.

“But one obscure company that has been quietly flowing under the radar ticks all the boxes needed to be the next 10-bagger in your portfolio…

“And if I had to pick just one stock with the highest upside right now…

“Hands down, this would be the one.”

Feeling tingly yet? Upside isn’t everything, of course, and Abeyta does, like most growth-focused pundits, have a history of this kind of “if I had to bet it all, this would be the no-brainer” pitch — if you want a little buzzkill to keep your greed in check (which is always a good thing), just remember that he teased crytocurrency broker Voyager as “the biggest, most obvious, investment opportunity I’ve uncovered in 25 years” through most of 2021, and that company was near zero and declaring bankruptcy within a year of those statements. That’s not to say Abeyta’s an idiot because of this error, I also owned Voyager for a while, and every speculator picks some stinkers, it’s just a reminder that enthusiasm does not guarantee success… but it does makes you itchy and drive fast decisions (which is why marketers use those emotions, of course, they encourage you to pull out your wallet — the enemy of any ad is “stop and think”).

So if you find yourself wrapped up in that “FOMO” feeling, my suggestion is to at least try to exercise some discipline with position sizing… in other words: you can sit down and play poker if you think the deck is hot, even if you’re not sure you remember the rules, there’s nothing wrong with a little fun and speculation — but in the first flush of excitement after landing in Las Vegas, you should probably sit down at the $100 table, not the $100,000 table.

Enough buzzkill? OK, let’s get back to the hints… what else do we learn about this company?

“It has already inked deals with industry leaders like Shell, Microsoft, Raytheon, the Department of Defense, the U.S. Air Force, Bank of America, Cargill, and over 200 other companies across the globe…

“The best part is, this company rolled out its newest technology just a few short weeks ago…

“And my research tells me the Department of Defense (DoD) is one of the first clients to be taking advantage of it….

“The news that the DoD is onboarding this company’s technology is already out.

“And in just one month this year, this obscure company’s stock shot up 160%.

“But I believe there is still plenty of upside.

“March is just the beginning.

“As word gets out, we will witness a cascading effect as the company’s remaining clients start placing orders for this technology over the coming months.

“The way I see it, this stock is poised to explode.

“And if you want to take advantage of what is arguably the single biggest investment opportunity of this decade… you have to get in now while it is still under $25.”

Hmmm…. now I wonder if this is the same company he was pitching earlier this year. Let’s see what other clues he drops…

“Just one day after the launch of ChatGPT, Google Trends showed a marked spike in people searching for OpenAI, the developer of ChatGPT.

“But here’s the thing: OpenAI is not a publicly traded company.

“Which means regular investors cannot invest in it even if we wanted to.

“For example, tech entrepreneurs Reid Hoffman, Elon Musk, and Peter Thiel were among those who invested close to $1 billion into OpenAI.

“And in 2019, long before ChatGPT was developed, Microsoft invested $1 billion.

“So, unless you have a billion dollars, or at least a few millions, you can forget about investing in Open Ai.

“But do not let that worry you.

“The good news is, there is another powerful AI company that Microsoft has invested in, that you can buy shares of today for less than $25.

“And its technology is leagues ahead of ChatGPT.”

Then we start to get into specifics:

“I would wager that not one in 100 investors even knows this company exists.

“Yet it might just be the stock with the single most upside in the stock market today.

“How can I say that with so much conviction?

“It’s simple.

“Most of the best-performing stocks in history have four very distinct winning attributes:

• Growing revenues
• A dominant position in an explosive market
• Operational momentum
• A visionary leader

“This company ticks all of those boxes.

“In the last four years, its revenues almost tripled.”

And we get a chart showing that, with revenue going from $92 million in 2019 to $253 million in 2022… which rings a pretty loud bell in the back of my cranium.

Which means, dear friends, that this is a repackaged story from Enrique Abeyta — the ad is new, with a somewhat different argument, but he’s re-pitching the stock that we covered last month as his “Number 1 AI Stock for 2023”… this is, again, pushing an investment in C3.ai (ticker AI). So yes, the “#1 AI Stock” and “#1 ChatGPT Stock” are one and the same.

C3.ai started out, about 15 years ago, with a focus on using software to improve energy efficiency and reduce carbon emissions (and the expected carbon taxes), but shifted to focus on managing the data from industrial sensors, largely for the energy and utility industries (they spent a few years with the name “C3 Energy”, then called themselves “C3 IoT” for a while, for Internet of Things), and then, six or seven years ago, they saw the opportunity in managing all that data and using machine learning to provide useful insights for a broader universe of (mostly) big manufacturing companies in addition to their legacy energy and utility customers… and a couple years after that, before prepping for their 2020 IPO, they renamed themselves C3.ai. This is how they describe themselves:

“C3 AI is the Enterprise AI application software company. C3 AI delivers a family of fully integrated products including the C3 AI Application Platform, an end-to-end platform for developing, deploying, and operating enterprise AI applications and C3 AI Applications, a portfolio of industry-specific SaaS enterprise AI applications that enable the digital transformation of organizations globally.”

What’s new? No real financial udpates, but since I wrote about the company back in mid-March, they have released their version of an AI “chat” tool for enterprise search… in Abeyta’s words:

“… this company now has the latest search tool powered by generative AI.

“Unlike ChatGPT, its search bar retrieves answers from within a specific organization’s own knowledge base.

“For example, if NASA has access to this company’s generative AI, NASA employees can get exactly what they are looking for.

“Not just as text, but they can also get a summary which provides citations to the original documents where it found that information.

“What’s more, the new search tool can generate analytics, including charts and graphs, on the fly.

“Which means, unlike ChatGPT, which is often inaccurate… this is very, very accurate.”

AI shares did surge on the news of that “ChatGPT Competitor” at the end of April, what they call “C3 Generative AI for Enterprise Search” — we probably won’t know much about what the sales of that product are like for at least a little while (next earnings report is early June), or whether it’s really a significant product introduction or just an attempt to release something that catches attention with the ChatGPT zeitgeist, but their website announcing that product is here. That release and the investor attention on it drove the stock higher, it briefly reached $34, but the price is back now to the $22 neighborhood, where it has more or less bottomed out in the past few months, since the AI craze re-ignited at the end of February. It’s also right about where it was when Enrique Abeyta sent out his first pitch for the stock, in the second week of March.

What are we to think? Well, the problems that started to dissuade investors last year are still there. They’re still not profitable even on an adjusted basis, they’re not really expected to grow this year, though their record of revenue growth over the past several years was very good, and they will remain unprofitable, according to analysts, at least through 2025 — that’s why this once-hot market darling, which for a while after the well-timed IPO in late 2020 was trading at $150 per share, was in a long slow decline until ChatGPT caused the AI story to heat up again this year. The numbers haven’t gotten any better in the last month, or indeed in the last six months… but the story, thanks to ChatGPT, has gotten much better.

Yes, they have surprised investors with much lower (adjusted) losses every quarter since they went public, so that’s good… though those “beats” have come, at least in part, because stock-based compensation is unusually high, not because they’re making tons of sales (their stock-based compensation right now is more than 75% of revenue).

The good thing is that they’ve got loads of cash — partly because they’ve paid more than $300 million in stock-based compensation since they went public, they still have more than $900 million in cash that they can use to keep funding their growth, and that’s a lot for a company with a real business and a market cap of only about $2.5 billion… even as they lose money, their operations are only burning through about $150 million in cash per year at this point, and that should improve, so even if growth takes a while to emerge or become profitable, they can probably keep investing in R&D.

And why, exactly, did the stock give up its gains so quickly two weeks ago? I suspect that’s mostly due to the attentions of Kerrisdale Capital, which posted a negative analysis of C3.ai in early April, and also accused the company of having “accounting and disclosure issues.” I do not like to see accounting called into question, since that so often leads to ugly surprises, but I don’t know what the validity of their accounting accusations might be.

In general, when it comes to short-sellers who publish detailed work and aren’t just hatchet-wielders, I’m willing to go against them when their pitch is just that the stock is overvalued, since almost all “story stocks” are fundamentally overvalued, or if I disagree about the financial prospects of the business… but I would need to do more work and have greater conviction to go against allegations of actual fraud or accounting irregularities (they don’t go so far as to make accusations, and perhaps they’re overplaying their hand, but the “opportunities for fraud” that Kerrisdale mentions are their unbilled receivables and their transactions with cloud partners — I haven’t looked into those, but they imply that the boom in 2022 unbilled receivables from Baker Hughes could be one reason why C3.ai has been “beating” revenue forecasts).

We get the daydream stuff from the teaser ads, so I often think I should focus more on the negatives for you, if only to balance out that hyped-up optimism. So on the fundamental/valuation stuff, this is from the summary of Kerrisdale’s report (full report here):

“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….

“… 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….

“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.”

Kerrisdale thinks they’ll go back to $12 a share and continue to disappoint, Abeyta thinks there’s a potential for 1,000% gains as the AI story grabs attention and their new product becomes a hit. Who knows… maybe, in the end, they’ll both be right.

Personally, I’m still pretty skeptical, but the company does have more products now, and a larger number of customers who might be willing to throw money at AI projects, so there’s probably a better chance than six months ago that they can break out of their relatively small area of strength in energy and utility companies. I don’t really have the knowledge to judge whether or not their products are any good, or whether they have a chance to become an AI leader in anything but name, but that’s where patience can be helpful… if we give it enough time, and wait to hear what the sales are for those new products, the revenue numbers should tell us whether or not the product is any good.

The good news? This is now a tiny company, the market cap is down to ~$2.5 billion (and about $900 million is in cash, the enterprise value is only about $1.7 billion), which is a reason for some optimism because, as we saw first in January and then in the last week of March, it doesn’t take all that much investor attention to drive a small “story” stock much higher, and there aren’t really any other reasonable “pure play” artificial intelligence stocks for investors to get excited about just yet (and won’t be many more soon, I imagine, given how frozen the IPO market is at the moment — though you can bet that struggling tech companies everywhere are thinking of ways to change their name to somehow include “AI”).

So the stock could certainly go up again if there’s another wave of AI FOMO buying, if nothing else… but it still takes a lot of vision to see them exploding in value when their revenue growth is slowing down so dramatically.

I’d say they face long odds… but if you’re looking for reasons for optimism, and don’t wait to wait to see if they actually get some revenue growth from their newer AI products, well, Thomas Siebel has certainly beaten out the titans before, and done so against long odds with Siebel Systems in the 1990s, and he does own a heckuva lot of shares of C3.ai.

In the end, if I had to buy a “pure play” AI stock today, it would still be C3.ai, given the paucity of other options. But given their financials and the uncertainty in their future growth, I’m also a little glad that I don’t have to buy a pure play AI stock right now. Certainly some big chunks of my portfolio are already AI-exposed a little less directly, through holdings like NVIDIA (NVDA, which has almost doubled year-to-date because of AI enthusiasm, and is at a ridiculous valuation) and Alphabet (GOOG, which has suffered on perceptions that Microsoft is taking market share in search because of ChatGPT). I’m sure there will be a lot more “generative AI” products and stocks coming to market in the next few years, this isn’t a story that will begin and end with one stock.

That’s just what I’m thinking, though, and maybe I’m being a dummy. Maybe C3.ai will be the next tech giant… there will probably be evidence of that along the way, and you don’t have to be the first one to buy, but trying to buy the next tech titan is, at its heart, a faith-based enterprise. For every emerging technology and every new crop of hopeful companies, there has to be a little modicum of hope and faith that keeps investors hanging on, through what are always volatile and sometimes awful growing pains, to see how the story plays out. You can’t invest like that with all your money, and you can’t have faith in every hopeful, but if you want to be a long-term growth investor and try to find those occasional 1,000%+ winners, then you sometimes have to buy before the income statement makes sense.

So is Enrique Abeyta making a good call, is C3.ai going to be your bet on the emerging AI future? Think I’m being too pessimistic or careful? Think Kerrisdale is right and they’re just trying to ride the wave of AI enthusiasm without the business to back it up? Think the company is junk, but worth a trade anyway? Do let us know with a comment below.

Disclosure: Of the companies mentioned above, I own shares of Alphabet, NVIDIA and Amazon, and have sold covered calls on NVDA so it’s always possible those will be exercised (meaning I would have to sell the stock) during my three-day embargo period. I will not otherwise trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.