C3.ai Short Interest Hits 40%: Can AI Company Prove Doubts Wrong?

Given the rapidly growing demand for artificial intelligence (AI) as companies try to incorporate the hot new technology into many of their products and services, C3.ai (AI -1.76%) It’s a business that needs to thrive. But while the company is a pure-play AI business, its revenues haven’t really taken off this year. As a result, more and more investors are shorting the stock.

Short demand is increasing this year

One way to measure investor sentiment is by looking at a stock’s short interest as a percentage of its float. The higher the percentage, the more investors will doubt the company’s future and expect to see the stock price sink. While some of these factors may be speculative and based on short-term price movements, when short interest rises above 10%, there are often other additional factors behind the weakness.

In the case of C3.ai, the short interest is much higher than 10%. It is now over 40%.

AI Percentage of Float Brief Data by YCharts.

In March, Kerisdale Capital released a brief report attacking C3.ai’s business, saying, “Generative AI will do nothing to change C3’s business or financial direction in the near future.” Investors can certainly believe that, judging by the high short interest.

Why should investors be bullish on C3.ai?

C3.ai should be working fine. Above all, it has AI solutions for various industries. Demand should be through the roof, sales should be increasing, and policy updates should be regular.

But this is not happening. Instead, the company is pushing its target for adjusted earnings profitability, saying it needs to cash out and invest to pursue incredibly promising opportunities in AI. The company had previously forecast that it would achieve adjusted earnings profitability in the final quarter of its 2024 fiscal year, which ends in April. That’s no longer the case, and he hasn’t provided an updated timeline.

C3.ai posted a relatively modest 11% growth in its most recently reported quarter, with sales reaching $72.4 million for the period ending July 31. This is much lower than the rate of growth experienced a year ago.

AI Revenue (Quarterly YoY Growth) Chart

AI Revenue (Quarterly YoY Growth) data by YCharts.

The company needs to do more to show investors that it is gaining popularity from AIA, because it doesn’t seem like that right now. C3.ai needs to significantly improve its growth rate to prove the doubters wrong. The company is forecasting revenue for the completed fiscal Q2 to rest in the range of $72 million and $76.5 million. At the midpoint, this amounts to a 19% year-over-year growth rate. That’s an improvement from previous growth rates, but it doesn’t appear to be enough to win over investors. And while an improvement in growth rates is a cause for concern, a loss of profitability is not. Over the past four quarters, C3.ai has experienced a total operating loss of $291.4 million, outpacing its $273.8 million in revenue during the same period.

Although AI stock is up about 120% year to date, it is giving back some of its impressive gains. The stock price has fallen nearly 40 percent in the past three months. The hype is over, and investors seem to be losing hope.

Investors should stay away from C3.ai stock

The excitement around AI has driven C3.ai up to nearly $49 a share this year. There is little reason to expect the stock to return to that level anytime soon. Unless C3.ai can demonstrate to investors through its sales and forecasts that it is actually experiencing significant growth in demand for its products and services, it will be difficult to get investors excited about the stock again. Growth forecasts for the quarter ended show good growth, but investors want more, especially if the company is paying off profitability to pursue growth opportunities.

For now, investors are better off waiting on the sidelines to see if the company can prove it’s the real deal, because so far many investors are very skeptical — and with good reason.

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