You might think that Nvidia ranks as the biggest artificial intelligence (AI) winner so far this year. But there's at least one other stock that has delivered even more impressive gains.
Shares of C3.ai (AI 3.02%) have skyrocketed more than 250% year to date. Is this momentum about to taper off?
Not necessarily. Here's one big reason the AI stock could go even higher.
Why C3.ai is sizzling hot
Let's first take a look at why C3.ai is sizzling hot these days. The simple explanation can be summed up with the company's stock ticker: AI. Investors have become enthralled with pretty much anything related to artificial intelligence.
C3.ai markets a suite of enterprise AI applications. Its software supports customer relationship management (CRM), cash management, supply chain, and more.
The company was founded by Tom Siebel. He serves as CEO and controls over 56% of the voting power of C3.ai's outstanding shares. Siebel also founded Siebel Systems, which was acquired by Oracle in 2006.
In C3.ai's fiscal 2023 fourth-quarter results announced in May, the company stated, "Overall business environment for enterprise AI is more active than we have seen since the company's inception and seems to be accelerating." That's all investors needed to hear to send the stock into the stratosphere.
A potential turbocharger
The trajectory of C3.ai's share price has leveled off over the last few weeks. However, there's one factor that holds the potential to turbocharge the stock, yet again.
As of June 30, 2023, more than 36% of C3.ai's stock float was sold short. That reflects a staggering bet that the stock is going to plunge in the not-too-distant future.
But what if the short-sellers are wrong and C3.ai's share price jumps again? If that happens, we could see a monster short squeeze. Once enough short-sellers scramble to cover their positions, it's possible that C3.ai stock could skyrocket another 50% or more.
There are several potential catalysts for such a short squeeze. For example, C3.ai could benefit from a sympathy move on good news for another AI stock. The company should announce its fiscal 2024 Q1 results in a little over a month, and better-than-expected sales numbers or guidance that blow analysts away could also easily light the fuse.
Exercise caution
On May 15, 2023, C3.ai announced the results of its investigation into allegations made by two short-sellers -- Spruce Point Capital Management and Kerrisdale Capital Management. The company stated that none of the short-sellers' allegations were "supported by the facts." However, the short interest in C3.ai stock didn't drop after this update. Instead, it increased.
AI Short Interest data by YCharts.
I wouldn't bet against C3.ai (or any other AI stock) right now. There's simply no way to know how long the current momentum will last. On the other hand, I'd be cautious about scooping up shares of C3.ai, too.
The company isn't anywhere close to being profitable yet, so we can throw earnings-based valuation metrics out the window. But the stock trades at a forward price-to-sales multiple of over 14x.
C3.ai's prospects are improving. I'm just not sure they're doing so enough to justify that kind of premium valuation.
It's easy to see how C3.ai stock could move a lot higher. It's also easy to see how it could fall significantly. With a stock this hot that's attracted so many short-sellers, some investors will probably get burned.
