As was the case with many hot tech stocks that went public in late 2020 and early 2021, C3.ai (NYSE:AI) got ahead of itself. The enterprise artificial intelligence and machine learning software company priced its initial public offering at $42 a share on Dec. 9. AI stock more than doubled on its first day of trading. Two weeks later, it hit a high of $183.90 — 338% above its IPO price.
Today, shares sit 87% below that high as investors seem to have come to their senses. This no doubt has some questioning whether AI stock is now a bargain.
As artificial intelligence and machine learning become more widely used in the corporate world, C3.ai could see demand for its software increase. However, recent challenges suggest the company’s sales growth could come in below expectations. And even if it doesn’t, investors may continue to shun growth stocks in the face of rising interest rates.
AI Stock May Not Bounce Back Even If the Market Does
It’s important to note that fundamentals haven’t been the big driver of the drop in C3.ai’s share price. The company went public at a time when tech stock valuations were at their bubbliest. AI stock crashed in the spring of 2021, as the bubble in early-stage growth names, some of which were boosted by meme-stock mania, began to deflate.
Shares continued lower through the summer and fall, but the selling accelerated in November as concerns over higher interest rates rocked the market. As with other richly priced tech stocks, the issue was with valuation and not necessarily the underlying business.
While fundamentals played a minor role in AI stock’s decline, they may be what prevents shares from bouncing back. Until C3.ai clears up some company-specific concerns, they may continue to weigh on shares even if the tech sector rebounds.
C3.ai and Execution Risk
In early December, C3.ai reported results for its fiscal second quarter ended Oct. 31. On the surface, the results were solid. Overall revenue was up 41% year over year to $58.3 million, exceeding estimates. And the company reported a smaller-than-expected non-GAAP loss of 23 cents a share.
But BofA Global Research analyst Brad Sills noted in his post-earnings downgrade of shares that C3.ai is facing “sales execution challenges stemming from an unsuccessful sales reorganization.” Sills said subscription revenue growth was underwhelming, up 32% from a year ago to $47.4 million but below the Street’s forecasts.
Additionally, Sills pointed out that the company’s remaining performance obligations (RPO) were down 16% sequentially if you removed the expanded relationship with one of the company’s largest customers, Baker Hughes (NASDAQ:BKR). The analyst cut his price target for AI stock to $40 from $65 and reduced his rating on shares to “underperform” from “neutral.”
Stills was far from the only analyst to downgrade AI stock following the report. Analysts at JPMorgan Chase, Wedbush, Piper Sandler and Canaccord Genuity also cut their price targets, citing similar concerns.
The company’s next earnings report is expected in late February or early March. Until then, we won’t know if execution risk fears are overblown. If C3.ai delivers slower-than-expected growth in the quarters ahead, we can expect further selling in AI stock. And even if growth is in line with expectations, shares could continue to suffer from multiple compression in the tech sector.
The Bottom Line on AI Stock
At today’s prices, AI stock trades for 9.8 times projected FY22 (ending April 2022) revenue, and 7.4 times projected FY23 revenue. To some, this valuation may seem reasonable relative to the company’s long-term potential.
Yet, it’s too early to tell whether the recent execution issues are a short-term hiccup or a sign of things to come. Along with this issue, there is bearish sentiment in the tech sector and more hawkish fiscal policy to contend with.
Until there is more certainty, it’s not the right time to buy AI stock.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
