It only seems natural for investors to have high hopes for C3.ai (AI 3.02%). The artificial intelligence (AI) stock even has AI as its ticker symbol. But the pure-play AI company hasn't been generating the type of growth that other businesses have been achieving thanks to the growing demand for AI-powered products and services.
Even with the company pumping up its growth prospects, C3.ai's latest quarterly results weren't all that great. That begs the question of whether this stock, which is up nearly 150% this year, is heading for a free fall.
Where is all the growth?
For the period ending July 31, C3.ai reported first-quarter revenue of $72.4 million, which was at the high end of the company's guidance of $70 million to $72.5 million. Overall, the top line grew at a rate of 11%. But on a quarter-over-quarter basis the results were flat as the company posted the same revenue for the period that ended in April.
What's also concerning is that the company didn't raise its guidance either. It seems to be a tame performance for a company that, in its fourth-quarter earnings release back in May, sounded incredibly bullish on its prospects, stating that "the interest in applying AI to business processes is more active than we've ever seen."
Given C3.ai's wide reach into many industries and the company becoming increasingly diverse, investors likely would have expected stronger results. The day after the release of the results, shares of the AI stock fell by 12%.
The company also pushed back its goal for profitability
C3.ai reported an adjusted loss of $0.09 during the quarter. But it says that it needs to invest in its generative AI solutions and that it no longer expects to be profitable (on an adjusted basis) by the end of the current fiscal year, which ends in April 2024. The company says the "market opportunity is immediate," and that it needs to invest in lead generation and other efforts to help capitalize on the growth opportunities.
Despite the optimism, multiple analysts downgraded the stock following the release of earnings, and C3.ai's consensus analyst price target is now at just over $26, implying that it has already peaked. That's not what you might expect from a business that's on the cusp of so many opportunities. Analysts appear to have a healthy dose of skepticism about the company's near-term potential.
Is C3.ai stock likely to drop further?
C3.ai's stock has been performing exceptionally well this year, but there are cracks starting to show. In the past three months, for instance, the stock has fallen by 35%. Short interest as a percentage of float has also risen since the start of the year, from 8% to now more than 33%. If the company can't start to turn in some stronger results, there could be an uptick in short sellers, putting more pressure on C3.ai's stock in the process.
Growth stocks have been hot buys this year, but if that cools and C3.ai puts in another underwhelming quarter, I wouldn't be surprised to see the stock give back more gains this year.
C3.ai is a volatile stock that investors should avoid
There isn't a compelling reason to invest in C3.ai. The business isn't exactly booming despite having tremendous growth opportunities, and its prospects for profitability just got worse.
The company needing to invest heavily into marketing and sales is a potential concern as well. Given the excitement around AI, it shouldn't require a huge effort to close deals if companies are truly knocking on C3.ai's door. And yet C3.ai is ramping up marketing efforts as if it were having trouble on that front. Something doesn't add up here, and the company's flat quarter-over-quarter growth and no increase in guidance are troubling signs as well.
Unless you have a high risk tolerance and loads of patience, you're better off avoiding C3.ai's stock, as there are many red flags surrounding this business.
