What happened
Shares of C3.ai (AI -0.85%) were falling for the second day in a row today as investors continued to react to yesterday's short-seller report from Kerrisdale Capital.
Though there was no additional news out, C3.ai's lack of a public response to the allegations of accounting fraud may have shaken investors further.
After tumbling 26% yesterday, the stock was down another 16.2% today as of 3:27 p.m. ET. Over the two-day period, the stock is now down nearly 40%.
So what
C3.ai has not made a public statement contesting Kerrisdale's allegations, but the company did tell Bloomberg, "Their allegation that C3.ai's financial disclosures regarding Baker Hughes are somehow incorrect manifests a fundamental misunderstanding of U.S. GAAP (generally accepted accounting principles) accounting practices and principles."
C3.ai also called it a transparent attempt to manipulate the stock price.
In a letter to Deloitte & Touche, which is C3.ai's auditor, that it released publicly yesterday, Kerrisdale accused the company of booking fictional revenue and recording it as unbilled receivables.
Kerrisdale also said C3.ai was improperly recording consulting-based revenue as subscription revenue and claimed the company was a services-oriented business disguising itself as a subscription software business in order to earn a higher valuation from the market.
Now what
Even before Kerrisdale's attack, there were good reasons to avoid C3.ai. The stock had tripled this year on little more than hype surrounding artificial intelligence and the release of ChatGPT.
The company also saw revenue decline in its most recent quarter and continues to post wide losses. The valuation also looks stretched even after the recent decline, as the stock now trades at a price-to-sales ratio of around 10.
Kerrisdale's claims are credible, and investors deserve a response. Without one, I'd expect the AI stock to continue to drift lower.
