C3.ai, Inc. (AI) is the brainchild of billionaire tech tycoon Tom Siebel, who is known for his previous business venture Siebel Systems. Following the acquisition of Siebel Systems by Oracle Corporation (ORCL) in 2006, Tom Siebel founded AI as an artificial intelligence software-as-a-service (SaaS) company in 2009. AI went public on December 9 last year, raising $651 million by floating 15.50 million shares priced at $42. Shares of AI soared 173.8% on the first day of trading, making it one of the most successful tech IPOs in 2020.

The stock hit its all-time high of $179 on December 22.

However, AI has been losing momentum since. It has declined 39% since its IPO and 59.2% year-to-date. This price retreat can be attributed primarily to investors’ rotation to stocks that are well positioned to benefit from the fast-paced economic recovery.

So, here’s what could shape AI’s performance in the near term:

Industry Headwinds

The technology industry has been soft  since the beginning of 2020 because investors are rotating away from tech stocks to cyclical stocks with better upside potential amid the global economic recovery. This slump has been exacerbated by a few  macroeconomic factors, such as rising inflation and  Treasury yields. Despite big tech companies reporting record earnings and impressive growth in their financials, exogenous factors have caused the tech savvy benchmark Nasdaq composite to decline 4.4% over the past month. Shares of AI have declined 15% over this period.

With the government now negotiating to  launch extensive fiscal policies, including American Jobs Plan to upgrade the country’s infrastructure, the tech industry’s slump will likely continue in the near term. Also, with a global semiconductor shortage raising the prices of electronics, and thereby suppressing demand, the complementary demand for software should weaken.

Negative Profitability

AI’s 75.45% trailing-12-month gross profit margin  is 55.8% higher than the 48.44% industry average. However, the company’s trailing-12-month net income margin and levered free cash flow margins are negative 35.98% and 20.15%, respectively.

Also, its trailing-12-month ROA and ROTC are negative 5.24% and 23.91%, respectively. Moreover, analysts expect AI’s EPS to remain negative until at least 2022.

Trading at a Premium Valuation

In terms of forward EV/Sales, AI is currently trading at 22.70x, 458.2% higher than the 4.07x industry average. Its 29.59 forward Price/Sales multiple  is 604.1% higher than the 4.2 industry average.

Mixed Analyst Rating

Of the six Wall Street analysts that rated the stock, three rated it Buy and one rated it Hold, while two rated it Sell. The $135.83 12-month median price target  indicates a 155.1% potential upside. The consensus price target ranges from a low of $84 to a high of $195.

POWR Ratings Reflect Bleak Prospects

AI has an overall D rating which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

AI has a D grade for Momentum and Sentiment. The company’s declining share price since its IPO justify the Momentum grade. Also, analysts expect the company’s EPS to remain negative until next year, in sync with the Sentiment grade.

Of 73 stocks in the D-rated Technology – Services industry, AI is ranked #51. In addition to the grades we’ve highlighted, one can view AI’s Ratings for Stability, Value, Growth and Quality here.

Click here to view the top-rated stocks in the Technology – Services industry.

Bottom Line

Despite the current pullback, the tech industry is expected to grow substantially in the coming months due to the rapid digitization and integration of tech in virtually all industries. However, we think AI is best avoided now given it relative overvaluation and bleak growth prospects.

AI shares fell $0.15 (-0.26%) in after-hours trading Tuesday. Year-to-date, AI has declined -58.60%, versus a 10.54% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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