- C3.ai (AI) stock has lost over 70% of its value over the past 12 months.
- Despite beating estimates, Wall Street firms downgraded AI stock.
- It continues to be a tough macroeconomic environment for high-growth tech stocks.
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I’ve been bullish about C3.ai (NASDAQ:AI) before, but have been proven wrong. Such is the issue with investing in hypergrowth names. Sometimes reality is disappointing. Wall Street analysts have consistently slammed AI stock and reduced its price targets.
This kind of macroeconomic environment is particularly rough for growth stocks. The Federal Reserve is set to raise interest rates and thus, potentially trigger a recession. The higher rates mean that the discount rate used to value stocks moves higher, thus rapidly depressing share prices. It is in this environment that C3.ai’s performance will be assessed.
AI Stock Downgraded Despite Earnings Beat
Wall Street analysts are continuing to pile on the negativity for AI stock. This was around March after the third quarter (Q3) 2022 earnings results failed to impress. The latest downgrade comes from Morgan Stanley (NYSE:MS). The investment bank slashed AI stock’s price target from $31 to $20 and maintained its “underweight” rating.
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Previously, both Deutsche Bank (NYSE:DB) and Bank of America (NYSE:BAC) also expressed disappointment with Q3 results. Deutsche Bank in particular was very critical, with analyst Patrick Colville “[throwing] in the towel.” The investment bank pointed to a decrease in the number of customers as its impetus.
What’s important to note, though, is that technically, C3.ai actually beat earnings expectations. In Q3 2022, the company grew revenue by 42% year-over-year to $57 million. Revenue growth beat expectations by $2.6 million. Non-GAAP earnings per share was also higher by $0.19. Due to the tough macroenvironment, companies will have to beat expectations by a wide margin to get any praise from the investment community.
AI Stock Could Go Lower
After reaching a high of $160 in 2021, AI stock has actually been on a massive downtrend. Investors who bought at the high would have lost nearly 90% of their value. So, is it time to call for a bottom?
Not necessarily. I believe that investors should still be cautious about AI stock at this level. The stock reached an all-time low of $13.37 in early May and bounced off that price level. As there is no second bounce this level cannot be confirmed just yet to be a support level.
C3.ai will next announce earnings on Jun. 1. This should be an important date to investors as we have seen growth stocks that missed their earnings get absolutely crushed. A bad earnings print is a legitimate possibility in this type of environment. Enterprises have been scaling back on their budgets in anticipation of a slowdown in the economy. No doubt C3.ai’s sales could be affected.
Currently, the company has a market capitalization of $1.79 billion. This means AI stock could still be potentially overvalued even at these levels. In a scenario of an earnings miss, a 20% to 30% drop is possible.
Your Takeaway on AI Stock
Even at these levels, I still don’t like the odds of AI stock. The environment for high-growth tech stocks remains challenged. Such that even beating earnings expectations is not enough to avoid the wrath of Wall Street. The stock can clearly go much lower if it misses its targets. I am waiting on the sidelines with regard to AI stock.
On the date of publication, Joseph Nograles did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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