What happened
Shares of C3.ai (AI 0.72%) tumbled out of the gate Monday, falling as much as 13%. By the time the market closed for the day, the stock was still down 11%.
The catalyst that sent the provider of enterprise artificial intelligence (AI) software plunging was a downgrade and a cautious note issued by a Wall Street analyst.
So what
The bearish sentiment came courtesy of Wolfe Research analyst Joshua Tilton, who downgraded C3.ai to underperform (sell) from peer perform (hold). At the same time, the analyst assigned a price target of $14, suggesting downside risk for investors of roughly 30% compared to Friday's closing price.
C3.ai stock has been on a tear so far this year, with shares gaining 79% as of Friday's market close, riding the wave of excitement stoked by generative AI. The buzz has been palpable since late last year when start-up OpenAI debuted its next-generation chatbot -- ChatGPT -- which quickly went viral, amassing 100 million users within the first 60 days after its release.
Tilton believes the enthusiasm has gotten ahead of itself and believes the company faces near-term headwinds that the market is currently ignoring. The analyst believes there are "significant risks" to the company's growth prospects over the coming year and that Wall Street's expectations for its sales are unrealistic.
Now what
As much as I dislike the short-term focus of most on Wall Street, I think this analyst may be onto something. Late last year, C3.ai pivoted from a subscription-based to a consumption-based pricing model. At the time, the company said the existing setup wasn't well suited to the current economic environment.
I previously expressed concerns about the rapid and unexpected change, noting that it was a wild card and that "C3.ai will have to prove it can capitalize on the opportunity."
Furthermore, a recent short report released by Kerrisdale Capital levied a number of allegations against the company. While the jury is still out on the validity of the report as a whole, at least a couple of the assertions are valid.
Given the rapidly evolving business model and the other question marks, investors might do best to steer clear of C3.ai -- at least until there's additional clarity.
