Shares of artificial intelligence company C3.ai are down more than 20% in January
Despite recent overall declines in technology stocks, C3.ai has also come under pressure after Q2 FY22 financials
Long-term investors should consider investing around $22.
Shares of enterprise AI software group C3.ai (NYSE:) are down about 83% in the past 52 weeks and about 20.5% since the start of the new year. In comparison, the index returned around 10.2% over the past 12 months, before declining 15.3% in January.
C3.ai, whose platform enables companies to build AI-powered applications, went public in December 2020 and started trading at $100. Within weeks, the stock hit an all-time high of just under $185, a level that is now fading quickly in the rearview mirror.
AI stock closed at $23.46 on Wednesday. The 52-week range was $22.56 – 176.94, while the market cap is $2.3 billion.
Digitalization trends during the pandemic have put machine learning and AI in the spotlight. Recent stats suggest:
"Global revenues from artificial intelligence (AI) software are expected to reach $62.5 billion by 2022, an increase of 21.3 percent from 2021."
As a result, big tech names like Amazon (NASDAQ:), International Business Machines (NYSE:), and Microsoft (NASDAQ:) are putting significant resources into the segment.
Meanwhile, smaller names like C3.ai are also developing their own technology and software platforms. Other Wall Street AI stocks include Palantir Technologies (NYSE:), Splunk (NASDAQ:), Uipath (NYSE:) and Upstart (NASDAQ:).
On December 1, 2021, C3.ai released 2022 statistics. Revenue was $58.3 million, a 41% year-over-year increase. Of that amount, subscription revenue was $47.4 million, a 32% year-over-year increase. The adjusted net loss per share was 23 cents.
The main customer is the oil services group Baker Hughes (NYSE:). In total, C3.ai had 104 customers this quarter, 63% more than a year ago.
About the results, CEO Thomas M. Siebel said:
" We expanded our important relationship with Baker Hughes by extending the contract term, significantly increasing value, and securing that value as a guaranteed future C3 AI revenue stream."
Before the release of its quarterly results, AI stock was trading around $35. On January 24, it hit a record low of $22.56. Now the C3.ai shares are at $23.46.
What to expect from C3.ai stocks
Of the 10 analysts surveyed via Investing.com, AI stocks have a "neutral" rating.
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Analysts also have a median 12-month price target of $56.44 for the stock, representing an increase of more than 140% from current levels. The 12 month price range is currently between $31 and $103.
Analyst consensus estimates polled by Investing.com.
Source: Investing.com
According to a number of valuation models, such as those that consider P/E or P/S multiples or terminal values, the average fair value for AI stocks through InvestingPro is $27.45.
Fair value models by InvestingPro.
Source: InvestingPro
In other words, fundamental valuation suggests that stocks could rise by about 17%.
We can also look at the financial health of C3.ai, as determined by ranking more than 100 factors relative to peers in the information technology sector.
Source: InvestingPro
In terms of cash flow and growth, it scores 2 out of 5. However, the overall score of 1 point is a weak performance ranking.
Currently, the P/B and P/S ratios of AI stocks are 2.5x and 11.9x. By comparison, those stats for his peers are 8.2x and 11.5x. In other words, despite the recent price correction of many technology stocks, the industry is not yet offering great value.
Yet, according to the Brookings Institution, more than 40 countries now have strategic plans for AI. Therefore, the AI ??segment will likely be on Wall Street's radar for the coming quarters. We expect many investors to benefit from the significant declines in stocks such as C3.ai. buy in the declines. Their target price would be $27.45 which is the fair value stated by InvestingPro.
Alternatively, investors may want to consider buying an exchange traded fund (ETF) that holds AI stocks as its holding company. Examples include:
ProShares S&P Kensho Smart Factories ETF (NYSE:)
Global X Robotics & Artificial Intelligence ETF (NASDAQ:)
Robo Global® Artificial Intelligence ETF (NYSE:)
iShares Morningstar Small-Cap Growth ETF (NYSE 🙂
Finally, investors who believe the decline in C3.ai stocks may soon come to an end should consider selling a cash-backed put option in AI stocks — a strategy we discuss regularly. Because it concerns options, this setup is not suitable for all investors.
Cash-Secured Put Selling
Such a bullish trade could be especially attractive to those looking to receive premiums (from puts selling) or to potentially own AI stocks for less than their current market price of $23.46.
This strategy may be appropriate if investors are currently somewhat bullish or neutral on C3.ai stocks. Selling cash-backed put options on AI would generate revenue as the seller receives a premium.
For example, if investors sold the $22.50 strike put that expires on April 14, they could collect about $2.65 in premiums. Therefore, the maximum return to the seller at maturity would be $265, excluding trading commissions and fees, if the option expires worthless.
If the put option is in the money (meaning AI stocks are below the strike price of $22.50) before or at the expiration on April 14, this put option can be assigned.
The put seller would then be required to purchase 100 shares of C3.ai stock at the put option's strike price of $22.50 for a total of $2,250 per contract. In that case, the trader owns AI stock for $22.50 per share.
If the put seller is assigned AI stock, the maximum risk is comparable to that of stock ownership (in other words, the stock could theoretically fall to zero), but is partially offset by the premium received ($265 for 100 shares).
The breakeven point for our example is the strike price ($22.50) minus the option premium received ($2.65), i.e. $19.85. This is the price at which the seller would lose money.
Cash-secured put selling is a fairly more conservative strategy than buying a company's stock at the current market price. This could be a way to take advantage of any jerkiness in C3.ai stock in the coming weeks, especially around the earnings release.
Investors who end up owning AI stocks as a result of selling puts may further consider setting up covered calls to increase the potential return on their stocks. Thus, selling cash-backed puts could be considered the first step in owning stock.
Bottom Line
Shares of enterprise AI software company C3.ai are far from all-time highs of nearly $185 in December 2020. Wall Street is concerned about the company's lack of a clear path to profitability and its over-reliance on Baker Hughes, his biggest customer.
As most technology stocks are ready to end a month to forget, AI stocks now offers more value for long-term investors. Therefore, interested readers with a time horizon of two to three years should consider buying the dip in C3.ai stocks.
