Since its all-star performance after its initial public offering, C3.ai (NYSE:AI) has trouble holding the $50 level. The short interest of 8.6% on AI stock is not very bearish. And the valuations, such as its price-sales ratio of almost 30x, is not out of the ordinary.
What is holding AI shares back? Why are investors hesitant in accumulating a position in the company?
AI Stock Lacks a Lift From Breaking News
C3.ai posted barely any breaking news headlines in the last month. Its last press release, posted on June 9, is hardly newsworthy. The AI application software company announced a partnership with Snowflake (NYSE:SNOW). Snowflake customers will be provided with access to the C3 AI Suite. They will also get pre-built C3 AI applications. C3 said this will include “AI-based CRM, predictive maintenance, supply network optimization, and fraud detection.”
Chief Product Officer Houman Behzadi said that customers will get data architecture and management solutions, along with the transformational power from its AI applications. The news release lacked details on the financial terms. Will Snowflake pay C3.ai for the applications? Will Snowflake customers need to pay a subscription fee to C3.ai?
Without adding to its revenue, the partnership will not alleviate investor concerns about the stock valuation.
According to Stock Rover, AI shares score a 22/100 on value.
The weak scores will not increase until the company post better results. The stock is suffering because of that uncertainty.
In the fourth quarter, revenue grew by a modest 26% Y/Y to $52.3 million. Non-GAAP gross margin rose only slightly to 81% for the fiscal year 2021, up from 77% in FY 2020. The bad news is that costs still exceed revenue: non-GAAP operating income was negative $15.4 million.
Outlook
On slide 27, C3.ai forecasted another non-GAAP loss from operations for the first quarter of 2022 and the 2022 fiscal year. It will lose between $28 million and $35 million in Q1 and up to a $119 million loss for the full year.
Sooner or later, customers like Bank of America (NYSE:BAC), Standard Chartered Bank or Kosh will want to get more out of the AI product line. For example, the production release of Ex Machina meets the needs of the data scientist community. And with C3 attracting the top talent, customers get support from the brightest workers.
The company needs many more partnerships with bigger software names to get drive product sales. The stock is stuck in a trading range at $50 to $60 since the spring. Investors are taking a cautious wait-and-see approach first.
Analyst Price Targets
Analysts reaffirmed their ratings on AI shares in the last month. Four out of seven analysts rate the stock as a buy. Per Tipranks, the price target ranges from a low of $62 to a high of $167.
Analysts chose to ignore C3.ai’s quarterly and yearly losses ahead. The company met earnings per share consensus estimates. The cautious investor should second-guess the bullish analysts.
C3.ai is priced for hyper-growth but revenue growth of 26% is not impressive. Investors could consider MongoDB (NASDAQ:MDB) or DataDog (NASDAQ:DDOG) instead. At least on the charts, MDB and DDOG stock often bounces back after testing yearly lows. Conversely, AI stock went nowhere since April.
Potential Catalysts and Your Takeaway
C3.ai may announce more partnerships in the coming months. This would imply a wider addressable market and the potential for bigger revenue growth in the next few years. Speculators are not yet panicking over C3’s quarterly losses.
Yet if market sentiment for technology turns negative, investors will sell AI shares and buy mega-cap companies instead. Microsoft (NASDAQ:MSFT) has a solid track record of growing software subscriptions. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has a near-monopoly in the search engine and online advertising market. Both companies post consistently strong revenue and profits.
In times of uncertainty, AI shares are not suitable for speculators. Buy and hold investors who thought that AI would trade at $100 or more should rethink that assumption. The company will not post a profit this year and will test the most patient shareholder.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
