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 AI Stock for 2023” … so let’s dig in and get some answers for you.

Here’s the lead-in…

“… a $22 stock at the center of the AI industry…

“A breakthrough industry that’s growing faster than crypto, sports betting, and electric vehicles COMBINED…

“A stock that could very well be the next Amazon, Google, or Tesla….

“Today, for the first time, you’ll hear all about Enrique’s #1 AI Stock for 2023……

“And why you should drop everything and buy this stock by March 31.”

So what is it, you ask? The hints start dropping as we listen to the presentation…

“It is an unknown AI stock that is trading for just $22 a share.

“And when I say unknown, I mean it is off the radar of 99% of investors.

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

“Yet it might just be the single stock with the most upside available in the markets today.”

And some specific clues…

“… look at its revenue growth.

“In just four short years, it went from $92 million in revenue to $253 million.”

Oh, dammit, that’s it… that’s the clue. This is a company that is not at all “off the radar for 99% of investors” — at least, not investors who’ve been paying attention recently. This was the first company to go bonkers during the brief AI mania that caught fire after the dramatic release of the public ChatGPT AI conversation bot…. though that’s probably, if we’re being honest, just because it has the best ticker. This is C3.ai (AI), which calls itself an “enterprise artificial intelligence company.”

Here’s how they describe themselves on their website these days:

“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.”

I did a little speculating on C3.ai in 2021, when it was new to the markets and falling in price (it went public in December of 2020, a GREAT time to raise money and the reason why it’s still sitting on nearly a billion dollars in cash), but just with some call options — the company kept falling, because they remained extremely dependent on just a few very large customers, and didn’t seem to be able to sign any big new deals fast enough to encourage investors. So how are things looking now?

More from Enrique Abeyta…

“But here is the wildest part… this stock is trading at a fraction of the price it was two years ago.

“At $22, it’s actually trading at an 87% discount….

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“This company is an emerging leader in an ENORMOUS new $387 billion industry.

“And here is the best part: It is just getting started….

“And this firm is already a dominant player.

“It is partnering with major companies such as Google, Microsoft, Bank of America, and Shell.

“It has over 100 patents and pending applications in this breakthrough industry.

“An industry that – according to science magazine Cosmos – is ‘unfolding on a scale and at a speed that compares only to the sudden arrival of the world wide web.'”

And there’s apparently some big news coming that might change the story, per Abeyta’s ad:

“… my #1 AI Stock for 2023 has a little-known connection to ChatGPT…

“A ‘surprise’ release set to go live by March 31.”

We also get a little comment about the main reason this stock doubled in January…

“… there is something unique about this stock.

“Most of its peers are PRIVATE. That means only venture capitalists – or VCs – and accredited investors can invest in them.”

When ChatGPT was released, and the world was gaga for generative AI, C3.ai was one of the only “real” artificial intelligence companies around that was even halfway investable.

Though Abeyta has a high opinion of C3’s quality…

“The fact is… almost all American retirees need a way to fast-track their retirement account NOW.

“And one way to do that is by investing in QUALITY growth stocks when they are still small… before they blow up.

“And I believe that my #1 AI Stock is one of those quality stocks.”

Some comments about leadership and insider ownership from the ad:

“And its CEO is a true visionary, a Silicon Valley veteran who has won awards from Goldman Sachs, Glassdoor, and Harvard Business School.

“He has gone ALL-IN on his current venture.

“He owns over 4.7 million shares of the company’s common stock…

“And he’s lowered his salary to less than $6,000 per year.

“He has good reason to feel hopeful about his new firm’s upside.

“After all, he guided his last company to a 5,697% gain.”

Not sure where that “4.7” came from, Thomas Siebel owns about 6.8 million shares of AI (more on that in a moment).

Other reasons Abeyta likes this company?

“The energy industry is adopting artificial intelligence in a major way.

“Exxon is investing over $1 billion in this technology.

“That is because this technology can identify when an entire facility… or even just one component inside of that facility… will need maintenance before it actually needs it.

“And Shell is going ALL-IN on this technology.

“The energy giant has deployed 3 million AI sensors to gather data on more than 10,000 pieces of equipment.

“The company that provided these sensors?

“HOST: Let me guess… your #1 AI Stock for 2023?

“ENRIQUE: Exactly!”

And he breaks down the four things he looks for in a growth stock… most of which matches AI pretty well…

“Rule #1: Years of Rising Revenue Growth”

Well, maybe not this year — they’re guiding to only about 5% revenue growth — but certainly over the past four years the growth has been impressive.

“Rule #2: Competitive Edge in a Booming Market”

Don’t really know what their edge is versus other enterprise AI providers and product developers… but among publicly traded companies, this is pretty much it when it comes to “pure play” AI stories, and that’s something.

“Rule #3: Operational Momentum…

“It involves comparing how a company performs versus analysts’ expectations.

“A company that grows its revenue and earnings is a great prescription to make a lot of money in the stock market.

“Where you see even greater performance though, is when the company beats expectations.

“The best-performing stocks are companies that are growing revenue and earnings and beating analyst expectations, regardless of valuation.”

That’s a very Louis Navellier-type strategy: You want both earnings growth, and growing earnings surprises where the company outpaces analyst estimates. Here’s what Abeyta says about that:

“… for each of the past four quarters, the company we are talking about today has outperformed market expectations.

“More importantly, it has SIGNIFICANTLY surprised analysts’ expectations.

“By at least 27% every single quarter last year.

“That is a very good sign for its future prospects.”

Then we get more on that “new product coming” hint…

“As Forbes pointed out, ‘history suggests it’s dangerous to bet against [this CEO.]’

“And he’s brokered deals with Shell, Bank of America, Raytheon, Google, Microsoft, and even the U.S. Army and the Department of Defense.

“This is set to be a future household name. But mention this stock to anyone you know – and I can almost guarantee they have never heard of it.

“That is going to change very soon….

“It just announced a line of products that takes ChatGPT…

“The AI platform that reached 1 million users in five days…

“And applies the full potential of this tech to aerospace, oil and gas, utilities, health care, financial services, and defense.

“One former commanding general calls this upcoming release a ‘technology breakthrough,’ and says, ‘This is game changing for U.S. DoD… and can help dissolve the biggest barrier that we have to effective action.;

“And get this… we expect this product to come out by March 31.”

And the order form indicates that Abeyta put together this presentation in February, when the share price was a bit higher… so perhaps he likes it even more now. The order form includes this note:

“Why you need to take action before March 31 for the chance to make ten times your money on this little-known $27 stock.”

$27-28 was pretty much the top tick for AI this year, at least so far — it was at that price in the first week of February, and again in the first week of March, after the stock jumped 30% after earnings. Now they’ve given up those earnings gains, and analysts are generally leaning pretty pessimistic (most analysts call it a “hold,” there are more “sell” than “buy” ratings out there right now), so what are we to think, with AI back to the low $20s?

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.

But yes, they have surprised investors with much lower (adjusted) losses every quarter, so that’s good (the GAAP losses have often been worse than expected, but people tend to ignore those when it comes to tech stocks — stock-based compensation has to be included as an expense in GAAP accounting, but we would all like to pretend that it’s not real).

And yes, in case you’re curious, stock-based compensation at C3.ai is very high, so that might be one of the reasons they were able to “surprise” each quarter — it came in at $204 million over the past four quarters, which means that their stock-based compensation right now is more than 75% of revenue. That’s perhaps OK if you’re trying to incentivize workers at a rapidly growing company… it’s not so OK if the company stops growing, so this next year or so will probably be critical.

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, a lot for a company with a market cap of only about $2.5 billion… and their operations are only burning through about $150 million in cash a year at this point, so that could keep them going for a long time.

C3.ai is also interesting because it was founded by an “old technology” guy — AI is the second act of Thomas Siebel, who used to be known for leaving Oracle to start Siebel Systems, which became the dominant CRM software company in the pre-Salesforce days and ended up being bought out by Oracle in 2005 for about $6 billion (Siebel was a monster tech stock in the late 1990s, with a peak market cap well above $30 billion).

The initial push for C3.ai was in the energy business, helping oil companies and utilities and others maximize efficiency and reduce waste and emissions by doing real-time tracking with tons of sensors and feeding that data into AI systems.

I first covered AI in depth in the Fall of 2021, when it was being pitched by a Motley Fool newsletter and had been beaten down as a “broken IPO” a year or so after going public. The actual IPO price in December of 2020 was $42, but it opened trading in the $90s during that manic market, and stayed over $130 or so for a couple months until it began to collapse in March of 2021, beginning a pretty steady decline that took 18 months or so to bring the stock down to about $10 at the end of last year… after which it doubled on the ChatGPT enthusiasm to start this year, when everyone was chasing after just two or three “pure play” AI stocks (and only two stocks, BigBear.ai and C3.ai, that actually had the “ai” in their name). This is what I said back about 18 months ago, when I was still “on the fence” but willing to take a flier on some call options given their efforts to reinvigorate growth (those options expired worthless last Summer, just FYI):

September 27, 2021: “C3.ai sells enterprise-scale artificial intelligence (AI) applications to huge companies, largely for predicting or tracking complex systems to improve management, and has been very lumpy because of the size of those contracts, the big reliance on a few customers, particularly Baker Hughes, and the slow pace of making sales. That may be improving somewhat now, they are increasing their partner/cross-sell ecosystem and getting into new industries, though those improvements are not really in the numbers yet, and investors are probably wise to not be entirely convinced. The booked backlog and the revenue have grown at a relatively slow pace since the IPO, and at huge cost, with much worse operating margins as they ramp up selling and overhead expenses.”

Actually, I just went back and it looks like the stock started to catch my eye a few months before that, in May of 2021, I had forgotten that… here’s what I shared in a brief note in a Friday File back then:

May 28, 2021: “C3.ai (AI) is beginning to come down to prices where you could begin to make some rational valuation arguments… but it’s still really tough to justify unless you have a high degree of certainty that they’re going to add some more large clients — their “flagpole” customers are huge, they have only 30 or so customers and have a very concentrated dependence on their biggest customers (Engie and Baker Hughes brought in more than a third of AI’s revenue last year)… which is a challenge if you have a bad couple quarters with no big customer sales lose a big customer (so there’s also a specific and immediate risk right now, as they’re reportedly renegotiating the Baker Hughes contract).

“Still, they have huge contracts for an enterprise cloud software company, and if they’re as impressive as they believe themselves to be and can inspire other big customer to sign on (the strategy is to sign “lighthouse” customers and use them to impress the rest of the sector and bring on more customers), then they can grow into this valuation eventually. With that kind of customer concentration, though, and with customers where one big renegotiation can dramatically shake up the business, you have to know it really well to buy — and I don’t know C3.ai well enough yet to pay 30X revenues for what is expected to be only 15-20% revenue growth this year. Their lockup period expires in a week or so, it will be interesting to see if there’s a further dip and some big insider selling.”

There was a “further dip” to come, as we now know, the stock was around $62 in May, in a bit of a pause during a long decline, and in the mid-$40s in September of that year.

And now? AI trades at about 10X revenues, though it has lost more money as the revenue growth has picked up, not less. Baker Hughes (BKR) is still responsible for about 30% of their revenue, which is still a risk (the current BKR deal still expires in 2025, I believe, though BKR also owns 8% of the company, so perhaps they will be committed beyond that), and the big news this year is that the company is saying their revenue growth is slowing right now because they’re shifting to a consumption/usage model instead of pure subscriptions, but it will pick up once that model begins to generate growth and better margins. That might end up getting growth going in the future, assuming that they’re correct in believing that usage will grow, but it does add some more volatility to the revenue (as we saw from some of the other usage-based stories in tech, the one I remember is the cloud/edge provider Fastly (FSLY), who saw usage drop dramatically when they lost a lot of TikTok’s traffic). Having a lot of customer concentration, and a very small number of customers overall (the last number I saw was 236 active customers, though they rely heavily on just a few large ones), gives investors some reason to be cautious… though that picture seems to be getting a little better, with some new customers at least coming on board with smaller commitments.

C3 has released new products recently, including, as the “generative AI” craze took off following ChatGPT’s release, a new product called C3 Generative AI for Enterprise Search — that’s the new product introduction Enrique is talking about, they have said that it should be ‘generally available” in March of 2023 and that would make sense with his “March 31” deadline, but we probably won’t know much about what the sales of that product are like for at least a little while, or whether it’s really a significant product introduction or just an attempt to release something that catches attentino with the ChatGPT zeitgeist. That quote from a general is from AI’s press release for this new product.

Personally, I’m still pretty skeptical, but the company does have more products now, and more customers, so there’s probably a better chance that they can break out of their relatively small area of strength in energy and utility companies. I “bit” when C3 was first falling a couple years ago, and thought they were showing signs of turning the business around back then, but that was much too early… so I may be too cautious because of that experience, (like most of us, I suppose, I tend to be biased against stocks where I’ve made past mistakes), but I still can’t really get too interested just yet.

The good news? This is now a tiny company, the market cap is now down to ~$2.4 billion (and about $900 million is in cash, the Enterprise Value is only about $1.6 billion), which is a reason for some optimism because, as we saw in January, 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 anytime soon, I imagine, given how frozen the IPO market is at the moment)… so the stock could certainly go up if there’s another wave of AI FOMO buying. But it’s also a small foundation from which to grow, it’s a little hard to imagine C3.ai releasing breakthrough enterprise search products that do a better job for companies than Elastic (ESTC) and Alphabet (GOOG) and Microsoft (MSFT), or getting breakthrough AI/data processing contracts more easily than Alphabet or Snowflake (SNOW) or Palantir (PLTR) or Datadog (DDOG) or even IBM (IBM). They might, for sure, they are more focused on industrial enterprise applications and they do have some strong customers, and maybe they can build on that, probably none of those companies are really even competitors right now, since it’s so early days for AI… but it still takes vision to see them exploding in value when their revenue growth is slowing down so dramatically.

Or who knows, maybe C3.ai is building something important enough that they’ll get a takeover bid from one of those other much larger players (or someone else) — after all, Siebel’s first company went as far as it could and then stepped aside to let Oracle take over for the next stage of growth.

I’d say they face long odds, but if you’re looking for reasons for optimism, well, Thomas Siebel has certainly beaten out the titans before, and done so against long odds with Siebel Systems, and he does own a heckuva lot of shares of C3.ai. Siebel is certainly betting on himself, he does give away his shares in 30-50,000 chunks pretty regularly, and hasn’t bought any that I’ve seen… but he also hasn’t been a seller recently. He was a consistent seller in that first year after the IPO, he sold about $400 million worth of his AI shares in 2021, but he didn’t sell any in 2022 or 2023, and he still owns about 6.8 million shares, now worth roughly $150 million (Baker Hughes, in case you’re curious, owns 8.7 million shares of AI, they’re by far the largest non-index-fund shareholder).

In the end, if I had to buy a “pure play” AI stock, it would certainly be C3.ai. 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.

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 it 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? Have other favorites in this space that you think will outshine Siebel’s latest project? Do let us know with a comment below.

Disclosure: Of the companies mentioned above, I own shares of Alphabet and Amazon. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.