C3.ai stock price forecast: Is the AI bubble bursting?

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on Sep 7, 2023
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  • C3.ai share price has dropped by more than 35% from its highest level this year.
  • The company published relatively weak financial results.
  • Revenue rose by 10% despite the Generative AI hype.

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C3.ai (NYSE: AI) stock price made a bearish breakout in extended hours after the company published its quarterly results. It dropped by more than 7.8% and moved to $29, lower than Wednesday’s closing price of $31. In all, the stock has now fallen by more than 35% from its highest level this year.

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Is the AI bubble bursting?

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Generative AI has become the biggest theme in the market this year as investors react to the success of ChatGPT and other Generative AI products. As a result, companies like Nvidia, Microsoft, and C3.ai have done well this year.

Still, some analysts, including well-known investor, Jeremy Grantham, have warned about a bubble in the sector. Grantham, who has a net worth of over $1 billion, is one of the most respected people in Wall Street. GMO, the company he co-founded, has over $60 billion in assets.

C3.ai’s results showed that the company is not growing as fast as you would expect for a leading player in the industry. Its revenue in the quarter was just $72.4 million, higher than its estimated guidance of $70 million. It was the eleventh straight quarter that the company beat expectations.

Its subscription revenue rose to $61.4 million. Most importantly, C3.ai made a net loss of $0.56 per share and hinted that it will not be profitable this year. Also, the company’s balance sheet is strong as the cash and equivalents rose to $809 million. Analysts were expecting its cash to be $776 million.

C3.ai also made several deals during the quarter with companies like Cargill, Shell, Tyson Food, and Ball Corporation. It also secured a partnership with Saudi Arabia’s Neom and US DoD.

Is C3.ai stock a good buy?

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C3.ai stock

I have been a bit skeptical about C3.ai for a while, as you can read here. While it is a good company with quality customers, I believe that the stock’s performance has been driven by the AI hype. In most periods, stocks that jump because of hype tend to underperform in the long term. Some of the best examples are Mullen Automotive and Nikola.

C3.ai has become highly overvalued. It now has a market cap of more than $3.7 billion against annual revenues of $288 million. This is a high multiple using the price-to-sales ratio.

And it gets worse. C3.ai has a long documented history of making substantial losses. Its annual loss was $268 million in the TTM and I expect that profitability will be elusive for a will be elusive for a while. In a statement, the company’s CEO said:

“I would like to remind everyone on the call that we expect short-term pressure on our gross margin due to a higher mix of pilots, which carry a higher cost of revenue during the pilot phase of our customer life cycle.”

Therefore, my estimate is that C3.ai stock price will have a bearish breakout in the coming months, with the next target being at $16.78, the lowest level on April 28th.

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