Given the rapidly growing demand for artificial intelligence (AI) as companies attempt to incorporate the hot new technology into many of their products and services, C3.ai (AI 3.02%) is a business that should be thriving. But despite the company being a pure-play AI business, its revenues haven't exactly taken off this year. As a result, a growing number of investors are shorting the stock.
Short interest has been rising this year
One way to measure investor sentiment is by looking at the short interest in a stock as a percentage of its float. The higher the percentage, the more investors there are who are doubtful about the company's future, and who expect to see the stock price sink. While some of those reasons can be speculative and based on short-term price movements, when short interest goes above 10%, there are often other, more concerning reasons behind the bearishness.
In C3.ai's case, short interest is much higher than 10%. It has now reached more than 40%.
AI Percent of Float Short data by YCharts.
In March, Kerrisdale Capital released a scathing short report attacking C3.ai's business, saying that "generative AI will do nothing to change the business or financial trajectory of C3 any time soon." Judging by the elevated short interest, investors may indeed believe that.
Why are investors bearish on C3.ai?
C3.ai should be doing well. After all, it has AI solutions for a variety of industries. Demand should be through the roof, sales should be skyrocketing, and guidance upgrades should be the norm.
But that isn't happening. Instead, the company is pushing out its target for adjusted earnings profitability, saying that it needs to spend money and invest in pursuing the incredibly promising opportunities in AI. Previously, the company was projecting that it would achieve adjusted earnings profitability by the last quarter of its fiscal 2024, which ends in April. That is no longer the case, and it has not provided an updated timeline.
C3.ai generated a relatively modest 11% growth rate in its most recently reported quarter, with sales totaling $72.4 million for the period ending July 31. That's well below the growth rate it experienced a year ago.
AI Revenue (Quarterly YoY Growth) data by YCharts.
The company needs to do more to show investors that it will benefit from the rising popularity of AI because, as of now, that doesn't appear to be the case. For C3.ai to prove its doubters wrong, it will need to drastically improve its growth rate. The company is forecasting revenue for its just-ended fiscal Q2 will land within a range of $72 million and $76.5 million. At the midpoint, that would amount to a year-over-year growth rate of 19%. That would be an improvement from the prior growth rate, but it doesn't appear to be enough to win investors over. And while an improving growth rate is reason to be bullish, a lack of profitability isn't. Over the past four reported quarters, C3.ai has incurred operating losses totaling $291.4 million, exceeding the $273.8 million in revenue it accumulated during that stretch.
Although the AI stock is still up by around 120% so far this year, it has been giving back some of its impressive gains. Its share price has fallen by almost 40% in just the past three months. The hype has been wearing off, and investors appear to be losing hope.
Investors should avoid C3.ai stock
Excitement around AI propelled C3.ai to a high of nearly $49 a share this year. There's not much reason to expect the stock will get back to that level anytime soon. Unless C3.ai can demonstrate to investors, through its sales and its forecasts, that it is truly experiencing significant demand growth for its products and services, it'll be difficult to get investors excited about the stock again. The bump up in the growth rate forecast for the just-completed quarter shows good progress, but investors will want more, especially if the company is sacrificing profitability to pursue growth opportunities.
For now, investors are better off waiting on the sidelines to see whether or not the company can prove it's the real deal because, as of now, many investors remain highly skeptical -- and for good reason.
