What happened
Shares of artificial intelligence (AI) software company C3.ai (AI 3.02%) were falling on Monday, down 7% as of 11:03 a.m. ET. Those invested in the stock since the beginning of the year likely aren't complaining, though, as C3.ai has still more than tripled in 2023, despite today's pullback.
However, those extraordinary gains might be the issue, with one major Wall Street firm calling for an end to the "AI bubble."
So what
Today, strategists at Morgan Stanley made an interesting call on AI stocks that might be considered in a bubble. While the strategist Edward Stanley centered his arguments around Nvidia (NVDA 6.18%) and some AI exchange-traded funds (ETFs), C3.ai could be considered even more speculative than either Nvidia or any ETF, since its stock has taken off even as its revenue has been stagnant thus far this year.
Anyway, Morgan Stanley's thesis is more technical, having to do with current movements in stocks relative to past bubbles. It says Nvidia's 200%-plus rally (208% since the beginning of the year) would exceed the median 154% rally that past bubbles have exhibited in the three years leading up to their peaks.
Because Nvidia is the poster child for AI stocks, the strategist therefore concludes the AI movement might be in its "later innings." And given that C3.ai has rocketed even higher in 2023 than Nvidia has, and it tends to trade in sync with Nvidia, there is a good shot that if Nvidia's rally is running out, C3.ai's is, too.
On the other hand, Edward Stanley also points out that not all stocks within the AI ecosystem may be in a bubble, with more diversified ETFs such as the MSCI USA IMI Robotics & AI Select Net USD Index up only about 47% this year. While Nvidia is a large component of that index, most of the other components are other large-cap FAANG and semiconductor names.
Now what
So, should investors panic and sell off C3.ai and other AI stocks? I think there is a good case that C3.ai might very well be in bubble territory, but that other large-cap beneficiaries from AI are not.
After all, many of the FAANG names are still below their 2021 highs and are arguably in the best position to derive benefits from AI, given their scale and troves of proprietary data.
Also, the AI revolution could be even more consequential than the birth of the internet and the PC. While Morgan Stanley is skeptical, just last week Wells Fargo analysts called AI "one of the most, if not the most, important technological revolutions in recent memory."
C3.ai is more of a specific software play, which works to build software targeted to particular companies and industries. While that is potentially very attractive if it executes, it's really unclear whether C3.ai will do better at driving business outcomes than other large data-oriented software companies, or even the large cloud infrastructure companies themselves.
The bubble moniker might be more appropriate for C3.ai. The company only posted flat revenue last quarter, it's unclear how new customer engagements will translate into revenue, and its moat against very large and well-funded cloud incumbents is also unclear.
Thus, it's no surprise to see the stock sell off hard today, even as Nvidia and other big tech stocks largely remain in positive territory in spite of Morgan Stanley's call.
