What happened
Shares of C3.ai (AI -2.15%) were pulling back again this week as the software-as-a-service company for artificial intelligence continues to fall out of favor. Investors seem to be questioning the stock given a short report earlier in the month and its still-lofty valuation.
The primary culprit for the sell-off was an analyst downgrade, but the stock also missed out on big gains in the Nasdaq index after tech giants like Microsoft and Meta Platforms turned in strong numbers.
According to data from S&P Global Market Intelligence, C3 AI was down 12.3% for the week through Thursday's close.
Image source: Getty Images.
So what
The main reason for the stock's decline was a downgrade on Monday from Wolfe Research, which lowered its rating from "peer perform" to "underperform," causing the stock to fall more than 10% that day.
Analyst Joshua Tilton said that he sees "significant risks" to fiscal 2024 revenue growth, and that consensus estimates for revenue are too high by 10%. Tilton also said fourth-quarter earnings (due in June) could disappoint, and that the transition to a consumption model will be a headwind on revenue growth. He gave the stock a $14 price target, implying a 30% decline at the time of his report.
Investors, already jittery after the short report from Kerrisdale Capital earlier in the month, bailed on the news.
Later in the week, C3 AI was also conspicuously absent from a rally in tech stocks that followed strong reports from Microsoft and Meta Platforms.
What was also notable was that for all the talk about AI from Microsoft, Meta, Alphabet, and Amazon -- companies which include the top-three cloud infrastructure services -- there was hardly a mention of C3 AI, which has previously talked up its relationships with Google Cloud and Amazon Web Services.
C3 AI is a small company, of course, with a market cap of just $2 billion. But those earnings reports were a reminder that there are plenty of other companies moving fast in AI and any one of them could become a direct competitor to C3 AI, which bills itself as an enterprise AI platform.
Now what
C3 AI stock tripled earlier in the year on hype around artificial intelligence, but it's since given up much of those gains, as there's no fundamental reason for them.
The company reported a decline in revenue in its most recent quarter, and it continues to operate at a loss. Meanwhile, the short report brought up a number of good points, including C3 AI's revolving door at the CFO position, and that the company has changed how it defines a customer.
C3 AI could prove itself over the long run, but based on recent evidence, investors are right to be skeptical of this AI stock.
