C3.ai Stock: After The Pump, Here Comes The Crash (NYSE:AI)

BrianAJackson

C3 investors refused to let AI-hype train C3.ai (NYSE:AI) stock fall apart, as they defended its bottoming process in April after a steep pullback. Coupled with the liftoff from NVIDIA (NVDA) recently, AI went into "bubble" territory as its valuation surged.

Seeking Alpha Quant rated AI's valuation with a "D" grade, down markedly from the "C+" grade it received three months ago. AI's forward sales multiple rose to 12.3x before the release of its earnings report yesterday (May 31), as April dip buyers likely bailed out.

Compared to the 6.2x sales multiple for C3's software peers represented in the iShares Expanded Tech-Software Sector ETF (IGV), the growth premium is likely hard to justify. Also, it isn't meaningful to consider AI's forward earnings multiple for now, as it's still unprofitable, even on an adjusted basis.

Despite that, management maintained its confidence in charting adjusted profitability by the end of FY24 (year ending April 2024). However, that likely wasn't enough to maintain its recent buying momentum, as AI fell more than 20% post-market.

With such an aggressive growth multiple baked into AI's valuation, the market is justified to expect much more from CEO Tom Siebel and his team. Makes sense?

With the generative AI hype fanning near-term sales momentum for Nvidia, as it reported monstrous forward guidance, investors likely wanted more from C3.

Management attempted to hype up its earnings commentary, suggesting it could meet its forward guidance without a significant contribution from its generative AI program. Siebel stressed:

"Generative AI could be 0, okay? And we're still going to run a cash-positive profitable business in Q4. You can expect [us] to be a non-GAAP profitable business in Q4." - C3 FQ4'23 earnings call

Wait a minute. While I applaud management's confidence in reaching its profitability targets by the end of FY24, I believe investors are likely looking for more tangible metrics. In addition, they likely want to know how generative AI could transform its path toward profitability and possibly even bring forward that projection.

Nvidia's guidance demonstrated management's optimism with substance, putting numbers into the hype. Leading semiconductor company Marvell (MRVL) disaggregated the forward revenue momentum from AI sales, highlighting a 100% AI revenue CAGR over the next two FYs.

Therefore, if C3 is confident in its ability to drive more sales momentum through the proliferation of generative AI, I believe investors have the right to ask management to show them the numbers.

Generative AI was mentioned more than 20 times between management and analysts on the call yesterday. As such, I'm skeptical about how C3 could prove that its enterprise AI business could capitalize massively on the generative AI tailwinds if management couldn't put out a "hard number" to the positive impact.

Given AI's expensive valuation, as investors likely baked in significant pre-earnings optimism over its generative AI growth drivers, I assessed that the market's disappointment is justified.

AI price chart (weekly) (TradingView)

As seen above, AI triggered a potential bull trap or false upside breakout with the surge this week. With AI's short interest as a percentage of float nearly 30% in mid-May, I believe short sellers who didn't expect a potential bull trap price action could have been forced to cover their positions as they got burnt by the recent breakout.

However, the bull trap could be validated if the post-market price action can be sustained by the end of Friday's (June 2) session. As such, it could encourage more sellers to return, intensifying the selling momentum against the recent buyers.

AI's price action is at a critical juncture as buyers look toward management to give them more reasons to continue its "vertical rocketship-esque" spike. With an expensive valuation and a still unprofitable model, excessive optimism has been reflected even with the post-earnings drop.

Investors who bought the dips in April should use the opportunity to get out before it comes crashing down subsequently.

Rating: Sell (Revised from Hold).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

We Want To Hear From You

Have additional commentary to improve our thesis? Spotted a critical gap in our thesis? Saw something important that we didn't? Agree or disagree? Comment below and let us know why, and help everyone in the community to learn better!

Sign up now for a Risk-Free 14-Day free trial!

This article was written by

Ultimate Growth Investing, led by founder JR Research, helps investors better understand a range of investment sectors with a focus on technology. JR specializes in growth investments, utilizing a price action-based approach backed by actionable fundamental analysis. With a powerful toolkit, JR also provides insights into market sentiments, generating actionable market-leading indicators. In addition to tech and growth, JR also offers general stock analysis across a wide range of sectors and industries, with short- to medium-term stock analysis that includes a combination of long and short setups. Join the community today to improve your investment strategy and start experiencing the quality of our service.

Seeking Alpha features JR Research as one of its Top Analysts to Follow for the Technology, Software, and the Internet category, as well as for the Growth and GARP categories.

JR Research was featured as one of Seeking Alpha's leading contributors in 2022.

About JR: He was previously an Executive Director with a global financial services corporation and led company-wide, award-winning wealth management teams consistently ranked among the best in the company. He graduated with an Economics Degree from Asia's top-ranked National University of Singapore and currently holds the rank of Major as a Commissioned Officer (Reservist) with the Singapore Armed Forces.

My LinkedIn

Analyst's Disclosure: I/we have a beneficial long position in the shares of NVDA, MRVL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.