C3.ai May Be In an Artificial Intelligence Bubble

Stock Market

Covering stocks, every once in a while an editor throws you a “Geez, Louise” assignment. That’s how it was with this request to cover C3.ai (NYSE:AI). Still, as one of the most hotly anticipated market debuts, I realized that AI stock charmed investors early on but has since left them bitterly disappointed.

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When you just consider the core business and nothing else, the volatility in C3.ai doesn’t seem to make much sense. As you can deduce from its brand and ticker name, the company specializes in artificial intelligence, specifically for enterprise-level solutions. Through big data and machine learning protocols, C3.ai’s platform calculates countless numbers of equations, helping businesses and institutions make better decisions.

What’s great about AI stock is that the underlying architecture isn’t based on whimsical theories. For instance, C3.ai makes 1.1 billion predictions per day, allowing various industries to optimize their supply chain flow and craft effective strategies based on anticipated consumer behavior. And the difference between human managers making these forecasts versus an AI protocol is that the latter is based on pure data.

This objectivity is exactly what our society needs to develop smart cities. Generally speaking, traffic patterns are consistent throughout the week, following the ebb and flow of the daily grind. Taking this data set, C3.ai’s platform can potentially direct or guide traffic flows, while making the best tactical decisions on the fly.

Another factor bolstering AI stock is applications for the defense industry. While we lever the greatest military force in the world, we’re not immune to the requirements of regular maintenance. The challenge, as with any other industry, is to make sure that maintenance is not performed too frequently or infrequently.

Again, C3.ai’s platform takes the guesswork out of the equation, leading to greater efficiencies, cost reductions and ultimately, saved lives.

Is AI Stock in a Sector Bubble?

But this begs the question, why the heck has AI stock flopped so badly? On a year-to-date basis, shares are down 50%. If so many major companies utilize the C3.ai platform, including 3M (NYSE:MMM) and Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B), why don’t investors feel the same?

Much of that had to do with the valuation, as InvestorPlace’s Thomas Niel pointed out recently. Indeed, AI stock continues to sport a rich premium, which has kept even the most ardent speculators on the sidelines. Still, with the drop in price, shares do look much more attractive than before.

That sentiment is echoed by our own Matt McCall, a true technology guru. He’s the one that kept pounding the table on the Roaring 2020s and so far, he’s been proven right. As he put it, the hemorrhaging in AI stock finally gives those on the sidelines a buying opportunity.

They both could be right. However, my concern with such a steep decline is that the fundamentals may not be supportive of AI stock. In other words, we could be in an artificial intelligence bubble.

One glaring statistic is that the “percentage of firms naming AI as the most disruptive technology declined from 80.0% in 2019 to 69.5% in 2020.” I should point out that this is a significant lead over cloud computing’s perceived disruptive potential at 11%. Nevertheless, enterprises may be discovering that AI isn’t nearly as wonderful as advertised.

In my college calculus course, we used as an exercise nonlinear regression to forecast future sales of Harley-Davidson (NYSE:HOG). The math was excellent because, you know, it’s the math. But it’s not necessarily appropriate to use nonlinear regression or any other analytical method to forecast sales because of the human element.

Consumer tastes change all the time. And our regression never took into account the demographic shift where millennials were far less interested in motorcycles than prior generations. Had we been demand planners for Harley, we would have been fired.

Only as Intelligent as the Operator

This segues into possibly the steepest challenge of AI stock and similar investments. At the current state of technology, artificial intelligence is only as intelligent as the operator. You have to know why you’re doing something, not just what you’re doing. No AI can do your thinking for you.

Because of that, AI has its limitations. As I mentioned in my Harley example above, an AI platform would probably calculate an upward move of revenue based on probabilities from prior data points. But in hindsight (in the context of this theoretical scenario), it would have been better for Harley to trust human sales and marketing managers, who can better gauge consumer sentiment on the ground floor.

For this reason, I’m still concerned about AI stock. The underlying company is a solid organization, don’t get me wrong. However, the market has spoken, so you may want to sit this one out.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.