C3.ai (NYSE:AI) stock came to market with a lot of hope on Wall Street. At first the price action in AI stock price reflected tremendous exuberance. It came out of the IPO gate on fire last year, where it rallied 100% in under two weeks. Sadly, by the beginning of January it had given most of it back up.
The bulls tried one more time and succeeded with an equally impressive rally. Unfortunately that too turned out to be a double top fail that led to calamity in the stock.
Since it reached its high in February, AI stock has lost 75% of its value. So far, it has been a bottomless pit and a bull trap for months.
The single ray of hope amid the dark clouds now comes from the fact that since May, it has shown signs of stabilization. That alone is not reason to double down on your bets. However, the artificial intelligence concept is alive, so the thesis behind this stock isn’t dead yet.
Green Shoots for AI Stock
The first step toward finding a bottom comes from stopping the deluge. AI stock seems to have based around $45 per share. There are nuances, so I wouldn’t call it a concrete floor. But the price action is encouraging, which is a potential step forward in its recovery rally.
The next step is more difficult to take. It comes after hard work where the bulls must tackle resistance lines they’ve established along the way.
For instance, breaking from $55 per share will be difficult. This was a sharp point of failure in September, and a severe ledge in July. The bears will not likely let it go easily. The best bet for AI stock owners is to hope for a headline to help plow through. The founder Tom Siebel has a good track record as a software entrepreneur.
He earned his stripes as an early executive at Oracle (NYSE:ORCL). He then founded his own company, Siebel Systems, and sold it for almost $6 billions to his ex-employer. Maybe he’s brewing something along those lines now with an exit strategy for C3.ai. Nothing spruces up a stock price like a takeover headline or rumor.
C3.ai Has Viable Fundamentals
That alone is not a viable investment thesis. Since I’m not talking about gambling, we also need to consider the fundamentals behind the company. C3.ai is still too new to completely rely on the metrics, but the trends are positive. Revenues are showing growth albeit they are still small. There’s also tangible improvement on a quarterly basis. As such, it’s logical to conclude that the company is going in the right direction.
Statistically, its price-to-sales ratio is also normalizing. This suggests that after the huge drop in AI stock, investors are now more realistic with their expectations. Another positive note is that the company’s cash flow from operations is slightly positive. With that in mind, management is less likely to panic, and more apt to implement its plans without financial pressure from banks.
Demand Will Remain Strong
The company’s potential addressable market is huge. Artificial intelligence is a necessary function for the future. The growth in Palantir’s (NYSE:PLTR) financials is proof that demand will be strong. Thanks to the pandemic, companies are now collecting more data than ever. Furthermore, the rate is increasing exponentially.
There’s no way humans can process this information efficiently without the help of machines.
Every business will have to employ AI and in every department going forward. The long-term thesis for success favors the upside potential from holding AI stock. Investors who stuck with it deserve a medal, but they would do well to remain realistic with the outcome. Since this is a speculative stock by definition, I would avoid adding to current losing positions.
Increasing risk should only follow a tangible improvement in the thesis. Catching falling knives is a risky business already. But in this case the assumption of a floor makes it a viable attempt. Since all other attempts have failed so far, I would not take a full-size position. Ideally, I would rather wait for some higher-low trends to develop as well. Nevertheless, this falling wedge is extremely sharp. These tend to reverse violently and without warning.
One thing is clear with AI stock moving forward: The fight is tightening between bulls and bears. It will see fireworks soon.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.