The Bull Thesis for AI Stock Is More Artificial Than Intelligent

Machine learning is the future of technology. That is probably what some folks were thinking when they bought shares of enterprise artificial intelligence firm C3.ai (NYSE:AI). Unfortunately for them, a buy-and-hold position in AI stock didn’t work out as planned.

I am not trying to say that artificial intelligence isn’t worth investing in. There is undoubtedly room for this market, as a whole, to continue growing.

However, this doesn’t mean that every business in the machine-learning space is worth your attention and your capital. It is important to always select stocks based on fundamental and financial data and not just on hype or hope.

It appears that AI stock has already had its hype phase and is currently on a downward trajectory. That is a shame, as some investors were left holding the bag.

AI Stock at a Glance

There are times when a stock goes down a lot and it is a tremendous buying opportunity. This isn’t one of those times.

Going back to where it all started in December of 2020, C3.ai priced its initial public offering (IPO) at $42 per share. The stock opened for trading at $100 on Dec. 9 and soon ascended to $109. It didn’t take long for the stock to top out and then peter out. On Dec. 23, it reached a 52-week high of $183.90 before embarking on a prolonged decline.

Even after ending 2021 at $31.25, AI stock wasn’t finished falling yet. Fast-forward to early February of 2022, and the stock is trading at just around $24.

One has to wonder what caused the share price to surge to $180-plus in the first place. Maybe it was IPO hype, the influence of Reddit users or a combination of these and other factors.

Financial Problems Getting Worse

In any case, informed investors should require airtight financial data in order to justify buying a “falling rock” stock.

When it comes to C3.ai, the requisite positive data just isn’t there. Sure, the optimists could point out that the company’s second-quarter 2021 revenue of $58.3 million showed an improvement over the year-earlier quarter’s revenue of $41.3 million.

Those are only the top-line results, though. Turning to the bottom line, we can observe that C3.ai incurred a net earnings loss of $56.7 million in the three months ended Oct. 31, 2021. That is drastically worse than the loss of $14.9 million from the year-earlier quarter.

The situation doesn’t get any better when we extend the time frame. While C3.ai sustained a net earnings loss of $14.7 million in the six months ended Oct. 31, 2020, the loss of $94.1 million in the equivalent six-month period of 2021 showed that the company is having major financial issues.

A Pair of Price-Target Cuts

It seems that neither the investors nor Wall Street’s experts are convinced that C3.ai has strong prospects in 2022.

The downward trajectory of the share price proves that investors are not particularly impressed with the company. What do the analysts have to say, then?

At least two big-bank analysts are not particularly optimistic. First, Bank of America Global Research analyst Brad Sills downgraded his rating on AI stock from “neutral” to “underperform,” which is similar to a “sell” rating.

Sills also cut his price target on the stock from $65 to $40. He observed that C3.ai’s fiscal second-quarter subscription revenue was lighter than expected.

J.P. Morgan analyst Mark Murphy, meanwhile, also issued an “underweight” rating on the stock. His target price for AI stock declined from $53 to $43. Similarly to Sills, Murphy noted the company’s disappointing subscription-revenue growth.

The Takeaway on AI Stock

It is entirely possible that the C3.ai share price will not even reach the reduced price objectives issued by Sills and Murphy. Both of those analysts cited the company’s subscription-revenue issues. Yet, that is not the only problem.

As long as C3.ai’s net earnings losses continue to widen, it is going to be difficult for any sensible investor to consider buying the company’s shares. Machine learning undoubtedly has a future, but there is no need to own a toxic asset even in this high-conviction market niche.

C3.ai currently gets a grade of “D” in my Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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