Is C3.ai Stock a Buy After Its Huge Sell-off?

You've no doubt heard the old investing adage to "buy on the dip." So when it's a big dip, should you buy an especially big amount of a given stock? Sometimes the answer is yes, but other times it's a hard no.

C3.ai (AI -0.83%) has been a spectacular winner this year, more than tripling year to date as of earlier this month. However, shares of the enterprise AI software provider collapsed last week, plunging more than 30%. Is C3.ai stock a buy after its huge sell-off?

Behind the decline

That steep decline came after short-seller Kerrisdale Capital sent a letter to C3.ai's auditor, Deloitte & Touche. Kerrisdale accused C3.ai of "serious accounting issues." In particular, the short-seller alleged that C3.ai used "highly aggressive accounting to inflate its income statement metrics" to meet analysts' estimates and hide "significant deterioration in its underlying operations."

This wasn't Kerrisdale's first shot across the bow aimed at C3.ai. In March, the company announced a short position in the stock. Kerrisdale stated that C3.ai was benefiting from the hype over OpenAI's ChatGPT. However, the short-seller maintained that "these speculative flames won't burn bright much longer, as the realities of C3's poor customer traction, failing sales partnerships, and financial pressures will catalyze what is likely to be a painful reality check." 

For its part, C3.ai responded that Kerrisdale's letter to Deloitte & Touche was "a transparent attempt" to drive its share price down. The company specifically noted that the short-seller's allegations about C3's financial disclosures related to one of its customers, Baker Hughes, reflected "a fundamental misunderstanding of U.S. GAAP accounting practices and principles." C3 added that all of the accounting disclosures and financial statements mentioned in Kerrisdale's letter had been reviewed by its independent audit firm without any issues.

Big opportunities 

There's no question that AI stocks, in general, have tremendous growth opportunities. C3.ai shouldn't be an exception. The company's AI platform can be used in multiple industries. Its current customers include several major organizations, including Baker Hughes, ConEdison, Raytheon, Shell, and the U.S. Air Force. 

C3 also has an impressive lineup of partners. In its latest quarter, the company announced new deals made in collaboration with Alphabet's Google Cloud, Amazon Web Services, and Microsoft's Azure. It has also teamed up with major consulting firms including Accenture, Booz Allen Hamilton, and EY.

The company was founded by Tom Siebel, who serves as C3's chairman and CEO. Siebel previously founded and led Siebel Systems before selling it to Oracle in 2006.

Some downsides

C3.ai isn't profitable yet. The company expects to post a non-GAAP loss of between $69 and $73 million in fiscal 2023. Its revenue in the most recent quarter declined 4.4% year over year. 

However, C3 believes that it's on track to generate positive free cash flow and non-GAAP earnings by the end of its fiscal 2024. In the meantime, its cash stockpile should be large enough to fund operations without the need for raising additional capital. 

The company also faces competition, primarily from organizations that opt to build their own enterprise AI platforms. The tools to use in developing these home-grown solutions are becoming even more plentiful with the rising popularity of AI. 

Another big knock against C3.ai right now is its valuation. The company's market cap tops $2.5 billion. That's a lofty amount considering that C3 will likely pull in only around $265 million in its current fiscal year.

And, of course, there are those Kerrisdale allegations. C3's response addressed some of the issues identified by the short-seller but not all of them.

Buy on the pullback?

I think it's entirely possible that C3.ai stock could rebound sharply after its huge sell-off. We could even see a short-squeeze scenario with nearly 26% of the stock float sold short as of March 15, 2023.

However, my personal take is that it's too soon to buy this stock on the pullback. There are still several unanswered questions raised by Kerrisdale. Also, while C3 projects that will generate positive free cash flow and non-GAAP earnings by the end of its next fiscal year, I'd like to see clear progress on that front. Such progress isn't apparent yet.

Buy big on a big dip? Not in this case -- at least not right now.