What happened
Shares of C3.ai (AI 1.18%) took a dive last month after a short-seller came out against the stock and a Wall Street analyst questioned the bull case in the artificial intelligence (AI) stock. According to data from S&P Global Market Intelligence, the formerly high-flying stock tumbled 47% in April.
As you can see from the chart below, most of those losses came early in the month after short-seller Kerrisdale Capital released its short report.
So what
Kerrisdale Capital had initially announced it was short the stock in March, but in early April it released a letter it had sent to Deloitte, which is C3.ai's auditor, as well as the Securities and Exchange Commission (SEC), accusing the company of accounting inconsistencies and implying fraud.
Kerrisdale accused C3.ai of falsifying revenue to make it look like the company was growing, and using billed receivables to allow it to book revenue.
It also argued that C3.ai wasn't really a software company, but more of a hands-on consulting firm, which deserves a lower multiple than software stocks.
Additionally, Kerrisdale noted that the company has had four CFOs in the last few years, implying unscrupulous accounting practices, and that the company had changed its name twice since its founding in 2009 from C3 Energy to C3 IoT before settling on C3.ai. According to Kerrisdale, that observation signals that the company had been searching for a buzzy concept to attach itself to, rather than being committed to AI from the beginning.
After the stock had tripled in the first three months of the year, the short report prompted fast selling in the stock as some investors seemed to take profits and sentiment in the stock shifted.
Later in the month, on April 24, Wolfe Research downgraded the stock to underperform as analyst Joshua Tilton noted the company's facing "significant risks" in hitting fiscal 2024 consensus revenue estimates.
He also pointed out that the company's transition to a consumption-based model has created a drag on revenue growth.
Now what
C3.ai responded to the short report, saying that its accounting is valid and up to generally accepted accounting principles (GAAP) standards. It also said that unbilled receivables are a normal practice in the software industry.
In addition to the short report, the company faces other challenges as revenue declined in its most recent quarter and it's still operating at a significant loss.
Management has promised that momentum was building, but investors should be skeptical of the stock due to the questions raised in the short report and the company's own weak performance.
