Although I am not an expert in artificial intelligence, I know enough about technology to like C3.ai (NYSE:AI). It’s in the right sector and it serves a wide addressable market. It is not industry-specific, meaning they could expand into where ever demand takes them. The only requisite is that they continue executing well to grow. AI stock should have better days ahead, and is worth some risk.
Before we go all in on a speculative stock like this, we should set the stage. It was a bloodbath on Wall Street Thursday so it’s not ideal to take risky bets. AI is still in its early stages, therefore still needs to prove itself. If great companies like Apple (NASDAQ:AAPL) and Palantir (NYSE:PLTR) are falling off cliffs, I should be leery of spec bets.
I don’t mean to insult the company by labeling it as such. It’s a stage that most new stocks have to go through. Investors usually require proof or time to develop courage. Unfortunately, often they get too enthusiastic, like taking AI stock to $184 per share. That was a 3.5 time increase from its IPO price in 10 days. Easy come, easy go, as they say, so those who chased late have suffered heavy losses.
AI Stock Is Down But Not Out
AI stock has fallen more than 30% since earlier this month. The temptation is to want to call a bottom but we shouldn’t. The proper frame for a new investor now would be to first admit it’s a bet. Bets are fine as long as we acknowledge they carry higher levels of risk. If the assumption is that it’s near a bottom, then we take a small bite. It is important that investors set the maximum size of the risk in advance. It’s even more important to stick to it.
For example, if I decide that I am comfortable risking $1,000 (random value for illustrative purposes), I should not add to that later. This is to say that I do not average down in a young stock. AI is not a child company and it has great pedigree. Tom Siebel founded it more than a decade ago. We know what he can do from his days at Oracle (NYSE:ORCL) and Siebel Systems. Odds are that he will do well with AI, too.
The bottom line is simple. AI stock is too young to buy with high conviction. But it is in the right industry and has great leadership so it is worth a risk.
Trends Suggest Exponential Growth in the Industry
The pandemic put the digital revolution into ultra-high gear. Corporations everywhere are rushing to get as high tech as they can. Humans can manage the systems but they will need to use AI to do it efficiently. Speed is of the essence and our brains cannot compete with computers. So not only is AI industry-agnostic, but within companies there will be demand from almost every department. From maintenance to risk management and to client relationship. Companies will need the help of computer decision making on the fly.
Eventually it comes to valuation, and this is where it gets tricky. So far we’ve made the slam-dunk argument for the market viability. We’ve also established that this team is up to the task. Next comes the question of worth. The experts on Wall Street have split opinions about it. Their price targets range from $84 to $200 and the average is $140 per share. Their ratings are also as bifurcated. Therefore, I would ignore all of their opinions and form my own.
In a bullish market I like taking a little risk on such a young stock opportunity. The traditional fundamental metrics are too messy to judge now, so there will be a leap of faith.
Whatever my total risk intent is for this, I would only take one third now. This leaves room to add on dips. This is different than averaging down because I would have held back on my risk size.
It is important to not increase the risk size without new evidence from the company. The stock market as a whole is too high and on shaky fundamentals. If that corrects, it will drag AI stock with it.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.