There was a great deal of hype surrounding last year’s public debut of enterprise artificial intelligence (AI) firm C3.ai (NYSE:AI). The volume and the share price of AI stock soared, causing some folks to wonder whether this would be sustainable in the long run.
As it turned out, the skeptics and doubters were right. The share price popped but then dropped and now unfortunately some investors are “holding the bag,” so to speak.
Does this mean that it’s time to sell and accept a loss? And, should prospective investors simply avoid AI stock altogether?
Not necessarily. If anything, the stock-price decline might be an opportunity to start a new long position or add to an existing one.
A Closer Look at AI Stock
How bad was the share-price rout in AI stock? From top to bottom, I’ll admit, it was a severe decline.
In December of 2020, C3.ai had priced its initial public offering (IPO) at $42 a share. This marked an increase over the previously established range of $36 to $38, which itself was already higher than the originally expected price range of $30 to $34.
However, the biggest part of the share-price hike took place during the Dec. 9 debut of AI stock. Stunningly, the shares opened for trading at $100 on that morning and got as high as $115, representing a 174% gain from the $42 IPO price.
But it got even more bubbly after that. On Dec. 22, the stock rocketed up to a 52-week high of $183.90.
Eventually, that bubble burst, though. A sharp decline commenced in early February of 2021. Today, AI stock trades at around $68.
So, should investors view this as a problem or an opportunity? It all depends on whether you see value in the company — and some positive fiscal data might sway your opinion.
First, the Good News
Much of the recent debate over AI stock is related to C3.ai’s recently reported third-quarter results.
Some folks will cherry-pick the good parts, while others will choose to focus on the negative data. But I’ll try to provide a balanced picture here, starting with the positive elements of the fiscal report.
As InvestorPlace contributor Chris Lau observed, C3.ai’s Q3 revenues increased by 19% on a year-over-year (YOY) basis, totaling $49.1 million. You’ve got to admit, that’s pretty impressive. Moreover, its Q3 subscription revenues — an important metric since it reflects recurring sales — rose 23% YOY to $42.7 million.
With those positive figures in mind, CEO Thomas Siebel commented, “I believe that we are increasingly well-positioned to establish a global market leadership position in enterprise AI software.”
It would be difficult to dispute with Siebel here. After all, the company provided full-year fiscal 2021 total revenue guidance of $180.9 million to $181.9 million. That strongly suggests that C3.ai has a blockbuster year in-store.
And Now the Bad News
Not everyone is as confident as the company’s CEO, however.
Lau provided a compelling argument on this. He argued that C3.ai exhibited a lack of momentum in some areas during Q3. Lau highlighted:
“In Q3, its gross margin rose by only one percentage point YOY to 75%. And C3.ai’s professional services revenue dropped from 16% to 13% of its total sales. Finally, the company lost $18.5 million in Q3, much more than the $10.4 million it had lost a year earlier.”
As Lau puts it, this may “undermine” bullishness for AI stock. So, what is a current or prospective investor to make of all this data? Personally, I’m going to consider the company’s ambitious fiscal guidance as valid until proven otherwise.
In particular, C3.ai’s Q3 subscription revenues really impressed me. Now, I’m looking forward to seeing if the company can do even better in the coming quarters.
The Bottom Line
As you can see, C3.ai’s third fiscal quarter was a “good news, bad news” situation.
If you’re on board with the company’s optimistic outlook, however, then it might be worthwhile to maintain a moderate position in AI stock. It could turn out for the better
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.