C3.ai is very 'fragile and sensitive' to its stock position, short-seller outlines

C3.ai shares have been riding the AI wave. But not everyone is happy with its performance. Spruce Point Capital Management Founder and CIO Ben Axler, a short-seller, has written an open letter to one of the company's directors questioning the company's business. Axler explains his concerns to Yahoo Finance Live's Seana Smith and Allie Garfinkle.

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SEANA SMITH: C3.ai shares have soared this year, up more than 200%, riding the investor excitement around AI. But the company once again the target of short-seller, Spruce Point Capital Management, the firm recently issuing an open letter to C3.ai Director Richard Levin, calling into question C3.ai's business as well as, quote, "unprofessional conduct" and treatment towards short-sellers from C3.ai CEO Tom Siebel.

We want to bring in Ben Axler, Spruce Point Capital Management, chief investment officer and founder, along with Yahoo Finance's Allie Garfinkle joining the conversation. Ben, it's great to have you here in studio. Now, we know that you've been going after C3.ai now for quite some time, 16 months, right around 16 months. You've called into question some of their business practices in the past. You've called it into question just the fact that they are-- that they tend to chase trends. What is your biggest issue with the C3.ai today or biggest concern?

BEN AXLER: I think there's just been a lot of exaggeration of the claims, whether it's the total addressable market, how much money they've invested in the actual AI technology, the customers of which they've revised multiple times. And again, if they're revising customers, how can we get confidence about the revenue?

So it's not just one thing. It's multiple things that add up to what we believe is a highly puffed business with big exaggerated claims.

SEANA SMITH: And then you say that after the company last week beat on both the top and bottom line. Yes, the guidance didn't meet the Street's expectations. I'm out there a bit disappointed. But Siebel have said once again that they do expect to be profitable in fiscal year 2024. That's not enough, or you're not buying it?

BEN AXLER: Well, I think he's made a lot of promises that have gotten pushed out multiple times in the future. So we want to see not just one quarter of cash flow, but we want to see evidence of multiple sustained cash flow. And we also think that the guidance, which you pointed out that slightly beat expectations, which were pre-announced, only came in at 10% revenue growth, on the low end, 15%. So that, to us, feels kind of low for AI, which is growing broadly and not necessarily justifying the 9 and 1/2 times, almost 10 times, revenue multiple that the markets assigned to the stock.

ALLIE GARFINKLE: Hi, it's Allie here. Ben, you know, I have-- I want to systematically run through some of these points, because, you know, investors are really excited about C3.ai. So I want to be really clear about where your concerns kind of lie. And one of them is, you know, this cash burn problem again, right? So I'd love to know, you know, a lot of tech companies aren't profitable. Why are you specifically so concerned about cash burn? Is it a product problem? Is it the lack of history? Where does it kind of start and end?

BEN AXLER: Well, I mean, the company has done nothing but burn through, I think, $150 million, almost $200 million of cash since we first outlined our concerns about the company. They had one, you know, positive cash flow quarter, but, you know, one data point doesn't make a trend. We want to see sustained, you know, cash flow. But it's also that dilution, right? I mean, look at the share counts continue to balloon. I think if you look at the operating cash flow and take out the actual non-cash stock, I mean, there would have been cash flow negative.

So this company is highly dependent on issuing its stock to employees. And if the public and employees aren't buying into the value proposition of the stock, then they're going to have to pay more cash to employees to recruit and retain them. So this is-- the company is very fragile and sensitive to keeping its stock valued the way it is.

ALLIE GARFINKLE: And I want to kind of, to that end, sort of move on to one of the other concerns you outlined in your report. Yes, I spent my weekend with your report. The CFO revolving door, a lot of companies move through CFOs. Why are you specifically concerned about C3.ai's movement through CFOs over the last 17, 18 months?

BEN AXLER: Well, I think the facts speak for themselves. I mean, one of the CFOs resigned, I believe, shortly after they came public or right prior, right around the time, which was a little bit unusual. And then they brought in an individual that we pointed out was associated with another company that had a financial restatement and a little bit of a problematic history. He resigned very shortly after our first report. And now, they're on to yet another CFO.

And so, you know, we do like to see some stability and buy in from the CFO. And we'll also point out that the current CFO recently sold stock as did a couple of directors after this, quote unquote, "pre-announcement" and statement that they have reviewed our claims and that everything's fine, yet the insiders are continuing to sell. And also, Baker Hughes, their largest strategic Investor, also sold recently as well after a hiatus going back to 2021.

So-- and then the last point I would ultimately raise is they have a buyback program, yet they haven't exercised recently at all to buy back stock. And yet they've made the claims that the stock's undervalued. So, you know, we want to see evidence of stability in the CFO position. We'd love to see a cessation of insider selling. And if they do believe in the future prospects, why not buy back stock?

SEANA SMITH: Ben, are you alleging fraud anywhere within the business, given the fact that the CFO position has been that revolving type door?

BEN AXLER: No, I'm not making allegations of that. That's beyond my means. But I am certainly making the claim that I believe there's a lot of puffery going on here. I think there's a lot of exaggeration about, again, the TAM, The Addressable Market, about how much money has been invested, and ultimately about the prospects for the business.

ALLIE GARFINKLE: And Ben, I also want to ask, if we're not alleging fraud, then what do you want to see? What is your message to Tom Siebel?

BEN AXLER: I think the message is get the customer straight, OK? I mean, we've now seen multiple revisions about what they claim to be the customers. Now, let's also rewind two weeks ago, they made a statement that they reviewed short-seller allegations and that there were no inaccuracies. And they didn't expect anything to come out of it.

And then this past quarter, deep within their supplemental, you'll see they added three slides discussing how they define customer engagement and also making a customer restatement. So I need to understand what are the customers, why do they claim it's very complex to measure a customer. And if I can't get confidence in the customers, I can't get confidence in the revenue.

ALLIE GARFINKLE: And you know, you've been sounding the alarm. You've sort of been making this point now for 16 months. But Wall Street doesn't seem to care. So I guess the last thing I'm wondering is, where's the disconnect? Is it just the ticker name that you think people are getting excited about?

BEN AXLER: Well, I think it is. I mean, there's a lot of retail engagement here. But where-- you know, where have been the large institutional growth technology investors? I fail to see many of them in the share price. I fail to see, you know, stability with the Baker Hughes relationship. And their continued selling, obviously, is a point of concern, the insider selling, which I already touched upon.

So again, I think there's definitely a disconnect about this company where it can go and certainly about the valuation. And you don't need to take my word for it. Look at the average consensus target price among the brokers that cover it. You'll get to an average target price of about $25 or $26. So look at where the stock is now, look at what other professionals are telling you it's worth, and then you'll come to the same viewpoint that I have that the stock's overvalued.

SEANA SMITH: I also want to point out that we did reach out to C3.ai for comment. And they pointed us back to a response that they published back on May 15, saying that the investigations-- their investigations found that none of the allegations or insinuations of wrongdoing made by either Spruce Point or Kerrisdale were supported by the facts. And they went on to say, and no irregularities misrepresentations or omissions in the company's prior disclosures were identified.

We'll hear from C3.ai's CEO Tom Siebel tomorrow. But Ben Axler, Spruce Point Capital Management founder, thanks so much for taking the time to join us here.

BEN AXLER: Thank you for having me.

SEANA SMITH: And of course, our thanks to Allie Garfinkle as well.