What happened
Shares of C3.ai (AI -1.94%) fell 26.1% in August 2023, according to data from S&P Global Market Intelligence. First, a well-respected analyst suggested that the market has formed an artificial intelligence (AI) bubble that should pop soon. Later, a lukewarm investor response to AI-focused chip designer Nvidia's (NVDA -1.54%) stellar earnings report underscored the market's loss of AI enthusiasm.
The first event drove C3.ai's stock 13% lower in a three-day span. The second resulted in a single-day price drop of 12%.
So what
Analysts at Morgan Stanley based their market bubble conclusion on technical analysis of Nvidia's recent stock chart, arguing that most historical bubbles of this magnitude would have popped already. If AI stocks continue to soar, investors will face an even sharper price correction when the steam engine runs out of digital coal.
C3.ai wasn't explicitly named in Morgan Stanley's report, but a company with AI in its name and stock ticker is naturally included in sectorwide market reactions.
The same baby-and-bathwater attitude applied to Nvidia's earnings report two weeks later. The semiconductor veteran exceeded Wall Street's consensus targets by a wide margin across the board and issued rosy guidance targets for the third-quarter report in November.
It's enough to drive a nervous man distracted, to borrow a phrase from Moby Dick. Many investors found it hard to believe that the soaring AI sector can fly much higher, so they cashed in some profits and walked away for the time being.
Now what
It's almost as if Wall Street is actively looking for reasons to distrust the ongoing AI boom. In all fairness, stocks like Nvidia and C3.ai have indeed skyrocketed unreasonably fast in 2023, and I can't fault investors for converting some of the paper profits into cold, hard cash. You never know when the market will peak and shrink, even if the long-term prospects of AI computing haven't changed.
For a crystal-clear example of this effect, consider the infamous dot-com boom of the late 1990s that turned into a historic bubble-pop in 2000. The internet really did transform how people live, work, and do business, but the changes were not as immediate as the early boosters expected.
Only time will tell whether the AI industry will follow a similar pattern or blaze a new path. Either way, C3.ai's stock will continue to soar or slump along with the broader market's interpretation of how the AI sea change is going. The stock is still up by 152% year to date, and Nvidia has more than tripled this year.
Like I said, I understand why people want to take some paper profits off the table at this point. Some of the dot-com bubble survivors are among the largest and most successful companies on the market today, but many of the early internet market darlings are only footnotes in Wall Street's history now. Each company and stock should be judged on its own merits, not lumped together with a roaring market trend.
I like what C3.ai is doing in industry-specific AI tools for business analytics. But the financial growth story hasn't started yet, and the stock is changing hands at a wing-melting 12 times trailing sales.
And on that note, I'll gladly keep an eye on this stock with the idea of perhaps buying it at a less-overheated price someday.
