For a time, C3.ai (NYSE:AI) looked unstoppable. The artificial intelligence (AI) player dazzled when it went public at $42 per share last year, surging 120% on its first trading day. The stock went on to more than quadruple, hitting a record $183.90 in February.
C3.ai's subsequent slump has been just as spectacular. It now trades at just over $63 -- having shed 64% in just a few months.
If you believe in C3.ai's long-term potential, you may think this dip is a buying opportunity. But first, you need to know why the stock has lost so much value in such a short time.
Image source: Getty Images.
C3.ai hasn't lived up to expectations
2020 was a great year for tech stocks. This was especially true for hypergrowth bets like Tesla and MercadoLibre, which delivered multibagger gains through the year.
C3.ai's explosive run since its IPO reflected investors' optimism that it could follow the footsteps of its high-growth peers. After all, the software company had pitched itself as a leading player in the growing market for enterprise AI -- an opportunity worth hundreds of billions of dollars every year. And with less than $200 million in annual revenue, C3.ai appeared to be barely scratching the surface of its growth potential.
However, investors were in for a rude awakening after C3.ai reported its fiscal third- and fourth-quarter earnings results. Despite beating Wall Street expectations with 19% and 26% year-over-year revenue growth rates, respectively, C3.ai's performance trailed that of other popular tech bets. For instance, Palantir Technologies (NYSE:PLTR) -- another player in the enterprise software arena -- reported a 49% increase in revenue in the quarter ended March 31, 2021. Palantir appears to be growing twice as fast as C3.ai -- and investors are voting for their favorite with their money.
Many software-as-a-service (SaaS) companies enjoyed a bumper year in 2020 thanks to the acceleration of digitization trends. But C3.ai had a different story to tell: The company depends on client demand for up-and-coming AI applications like predictive maintenance and smart grid analytics. These applications are exciting but are mainly used in cyclical sectors like energy and manufacturing. When business activity ground to a halt last year, some potential clients probably didn't see AI investments as a priority. In fact, most companies were focused on conserving capital during the darkest days of COVID-19.
As a result, C3.ai experienced a sales growth slowdown. This didn't sit well with investors, who are used to SaaS players delivering consistent growth.
The reopening tide is crushing pricey growth stocks
In 2020, the world turned to technology to cope with the pandemic. Investors seemed keen on tech growth at any price, driving Zoom and Snowflake to sky-high valuations. On the flip side, sectors hit hard by the pandemic -- like brick-and-mortar retailers and airlines -- saw heavy outflows.
Today, the tide has turned against high-octane tech stocks. With the global vaccination drive underway, the economy is showing increasing signs of life. As a result, investors are dumping pricey tech bets and moving into recovery trades like bank and energy stocks.
Hence, it's understandable that C3.ai -- which traded at a whopping 85 times sales at its peak -- has gotten caught in a wave of selling pressure. Even after its decline, C3.ai is still trading at an elevated valuation of around 29 times sales.
What's next for C3.ai
As the economy heads toward reopening, many tech companies may experience decelerating growth. At the very least, supercharged demand will likely taper off post-pandemic.
Ironically, C3.ai looks poised to ride the looming economic recovery. Many of its clients -- such as Royal Dutch Shell (NYSE:RDS.B) and 3M (NYSE:MMM) -- stand to gain as things get back to normal. Naturally, this will translate into higher demand for C3.ai's solutions. As a plus, C3.ai's salespeople and engineers will be able to make more client visits. This will potentially speed up the sales process and smooth out new software deployments. In other words, investors should expect better days ahead for C3.ai.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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C3.ai Is Down More Than 60% From Its Peak. Here's What Happened - The Motley Fool
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