What happened
Shares of C3.ai (AI -1.63%) dropped 15.7% in January, according to data provided by S&P Global Market Intelligence. Things were mostly quiet for the company after its disappointing earnings report in December. C3.ai is an unprofitable company with exciting growth prospects. After losing a ton of momentum coming into this year, it was the exact type of stock that struggled as investors ditched speculative growth stocks in January.
So what
After a couple of fantastic years, growth investors are seeing the other side of the coin in recent months. Low interest rates and unprecedented macroeconomic conditions drove investor risk tolerance to historically high levels. Valuations for growth stocks hit levels that we haven't seen since the dot-com bubble. As interest rates start to climb and economic activity inches back toward normal, those trends are reversing.
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C3.ai was one of those hyped-up companies with seemingly boundless opportunity. It provides artificial intelligence (AI) software as a service (SaaS) for enterprises that lack the scale or expertise to develop that technology internally. Automation and machine learning can be valuable for just about any business, and C3.ai has cultivated customer relationships in the energy sector, among others. Its leadership team has excellent pedigree, so it seems unlikely that this is a flash-in-the-pan offering dubious value to customers.
Still, the market got a bit carried away. Following its late 2020 initial public offering at $42 per share, the stock rocketed upward above $160. C3.ai couldn't sustain its price-to-sales ratio of 75, and the stock has since tumbled to $25. Investors have been disappointed by the company's growth, even though it expanded more than 40% in its most recent quarter. There are also major concerns about recent turmoil with C3.ai's sales strategy, weaker-than-expected projections, and failure to gain major clients in new industries.
In a market where investors are reducing risk, this stock was bound to take a steep dive.
Now what
C3.ai is a relatively high-risk stock that has the potential to deliver enormous returns. At a price-to-sales ratio of 12.5, the stock now has plenty of room to grow if the company can deliver operationally. The AI SaaS industry is nearly certain to grow, but C3.ai will have to navigate some stiff competition if it wants to reap the rewards.
In the meantime, the company is still unprofitable, so it doesn't necessarily have ironclad fundamentals to support its valuation. It will also struggle against stock market forces that have removed momentum from speculative growth stocks. Investors looking for long-term returns will have to ignore any volatility over the next few years.
