Stock splits are tools that companies can use to artificially manipulate their stock prices or share count. While they aren't always easy to predict, they are typically done for a specific reason and tend to draw interest from shareholders.
C3.ai (AI 0.31%) has been a popular stock to watch among retail investors, as the company has tried to tap into the enthusiasm brought about by the high-flying artificial intelligence (AI) sector. The company hasn't had a great year, and the stock is actually down significantly since going public at the end of 2020. Could a stock split be in the cards?
Why companies do stock and reverse stock splits
Before we examine whether C3.ai could conduct some kind of stock split in the near future, it's important for investors to understand what a stock split and reverse stock split is.
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A stock split allows a company to decrease its share price and increase its shares outstanding, while a reverse stock split does the opposite. It's crucial for investors to remember that stock splits do not change the market cap of a company, so if you own an equity position in a stock before some kind of stock split, the share price might change, but the actual equity position doesn't.
Why would a company undergo a stock split? Well, there are a few reasons, but the big one has to do with bringing the share price up or down for a strategic reason.
Let's say some high-growth AI company just went on a massive run, and now their stock price trades for more than $1,000 per share. That might look daunting to retail investors, so a company would conduct a stock split to lower the share price in order to make it more appealing. Stock splits can also boost liquidity.
A reverse stock split can be a useful tool if a company on the New York Stock Exchange or Nasdaq has fallen out of compliance. Both major exchanges require stocks to trade for over $1 per share for 30 consecutive trading days. If a company is struggling and has seen a big sell-off, but thinks they can turn things around and wants to stay on a major exchange, than a reverse stock split can increase the share price and serve as a bridge until the company gets back on its feet.
Will C3.ai make a move?
The enterprise AI company C3.ai has never conducted any kind of stock split. After listing its initial public offering at $42 in late 2020, the stock surged to as high as $161 per share, but now trades around $28.50 and at a $3.9 billion market cap. So the stock is not unattainable for investors in terms of price and also clearly in compliance with NYSE rules.
According to MarketWatch data, the majority of the firm's nearly 131 million outstanding shares are public, so there doesn't appear to be any need to boost liquidity. The only way C3.ai is likely to conduct a reverse stock split is if it experiences a significant sell-off, which is not necessarily impossible, especially if the stock market starts to struggle.
In the company's fiscal year, C3.ai lost nearly $289 million on revenue of about $389 million. That means the stock is likely overvalued -- at least when looking at valuation. Short interest at the end of June was also very high, at close to 21% of the public float.
However, it is not uncommon for AI companies with strong potential to trade at these kinds of valuations. C3.ai does seem to have potential. The company's software helps developers build AI applications, even if they don't have a ton of experience with building large language models. C3.ai also claims its software can help developers significantly cut down the time required in writing this complicated code.
Ultimately, while C3.ai might be overvalued, it still seems very unlikely that it would experience the kind of intense sell-off that would require the company to conduct a reverse stock split.
