What happened
C3.ai (AI +3.40%) shares fell 15.4% in December following a disappointing earnings announcement. The company reported quarterly results on Dec. 1 and beat Wall Street's estimates for both sales and net losses. However, analysts were discouraged by the software-as-a-service stock's commentary and outlook, leading to rating downgrades. The sell-off in high-valuation growth stocks thwarted C3.ai's recovery later in the month.
So what
C3.ai's results looked great on the surface level, but there were some details investors didn't like. Revenue rose 41% to $58.3 million. Remaining performance obligations, which represent contracted revenue for future periods, increased 74%. The company's net losses were also lower than anticipated, in part because of gross margin improvement. Those are all signs of an efficient and growing business.
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Issues arose with C3.ai's sales strategy and pipeline, however. The company reversed course on its previously announced sales team restructuring. The strategy was abandoned because management found the early results "unacceptable." None of the sales reported metrics reflected this issue yet, so it could indicate a period of weaker growth coming in 2022 or 2023. That's the sort of threat on the horizon that frightens growth investors, clears out speculators, and squashes momentum.
C3.ai also announced the departure of its CFO, creating instability that growth investors don't like to see. Analysts were disappointed by several of these factors, and negative research reports were published.
Now what
It's a tough market these days for most growth stocks, especially those with expensive valuations. In the case of C3.ai, it didn't take much for analysts to sour on it, and the stock took a beating. Its quarterly earnings certainly weren't all rosy, but it's hard to see how that report erased $500 million in equity value.
Overall, the stock is down 75% over the past year. Its price-to-sales ratio slid from a high around 80 to its current level below 15.
AI Price-to-sales Ratio & Price data by YCharts
C3.ai may have been flying too close to the sun. Concentration in a handful of large customers and the inevitability of increasing competition are certainly issues to consider. Still, this company is an early mover in a promising growth industry. It has an accomplished management team, and it's gaining traction with more customers from new industries.
The stock is suddenly a lot cheaper for any investors who happened to be waiting for a more palatable price to buy shares. The ongoing impacts of Federal Reserve tapering are likely to cause more volatility for C3.ai, but there's a strong long-term bull case to be made.
