Artificial intelligence (AI) has been such a hot trend this year that even the mere mention of AI-fueled products and services can lead to a rise in share price. C3.ai (AI 3.02%) is a pure-play AI company that provides solutions to businesses in many industries. Even its ticker symbol is AI. Year to date, its shares are up an incredible 180% -- and that's even after the stock gave back some gains in August.
There has, however, been some increased skepticism of the stock. While it has been riding high due to the excitement surrounding AI this year, September could determine whether the stock's recent decline continues, or if it can turn things around and get back to rising in value.
Earnings come out next month
Earnings season is over for many companies, but C3.ai's first-quarter earnings call is scheduled for Sept. 6. It's going to be a big test for the company, given how well another AI-focused company performed recently. Nvidia, which makes AI chips and has experienced strong demand this year, soundly beat expectations last week. Its data center business grew at an incredible 171% to more than $10.3 billion for the period ending July 30.
C3.ai doesn't make chips and is a much smaller company than Nvidia, as it generates less than $270 million in sales over the course of a full year. But having less revenue can also make it easier for a company to generate a high rate of growth, especially if it's focused on AI, where presumably many businesses are spending money these days.
Will the company beat and raise?
The pressure is going to be on C3.ai to not just beat expectations, but to raise its guidance. Earlier this year, when the company forecast its guidance, it was projecting the top line to rise as high as $320 million for the new fiscal year (which ends in April 2024). That implies a growth rate of only 20% from the $266.8 million in revenue it reported last fiscal year.
In an interview with Barron's this year, CEO Tom Siebel said the company was "now in position to beat-and-raise, beat-and-raise, and beat-and-raise."
Given Nvidia's impressive growth suggesting that AI spending is strong and C3.ai's relatively modest guidance, it would be a disappointment if the AI company didn't blow past expectations for the current quarter. The danger is that if it doesn't, the bears could be out in full force and the stock could be in danger of sliding further down. In the past month, shares of C3.ai have fallen by 21%.
There are plenty of short sellers betting against the company
One of the reasons that the stock has come under pressure of late is that short interest in the company has been rising. At 33%, the percent of float that is short has increased significantly this year.
AI Percent of Float Short data by YCharts
There is the potential for C3.ai to benefit from a potential short squeeze, given all this bearishness, but to do that, it would need to prove the doubters wrong. That won't be an easy task, as even an earnings beat could still be underwhelming if the guidance isn't strong enough.
Investors should be careful with C3.ai's stock
C3.ai isn't a stock I would buy, as the business hasn't proven that it will be a big winner from AI-related trends this year. In its most recent quarter, sales were flat, and that period ended in April, after ChatGPT was already soaring in popularity and AI was boosting share prices.
It could be that it takes C3.ai a longer time to close deals than other companies, but sooner or later, it will need to prove to investors that it's the real deal and that there will be a lot of growth for the business due to AI. And if there isn't, there could be a massive sell-off.
Given how volatile the stock may be, for most investors, C3.ai wouldn't make for a suitable investment option right now. Unless you have a high risk tolerance, you're better off waiting on the sidelines to see how strong C3.ai's current results look like before deciding to buy the AI stock.
