The decrease in C3.ai's share price by 11% occurred on a Thursday.
AI-focused company C3.ai (AI dropping 0.18%) shed 11.2% of its shares before 10:50 a.m. ET today, following KeyBanc analyst Eric Heath's downgrade of the stock from sector weight to underweight, which is equivalent to saying hold to sell.
As per Heath's analysis, despite closing at around $40 the previous night, C3 shares are estimated to be worth nearer to $29.
Is C3 overpriced?
Value plays a significant role in today's downgrade by KeyBanc. Heath highlights that even accounting for cash reserves, C3 shares are priced at an astounding 13.3 times annual revenues, which is nearly twice the typical valuation of its AI companions (7.3 times revenues).
Interestingly, Heath does not present a price-to-earnings evaluation for C3 shares as it lacks earnings to calculate such a figure. Moreover, the majority of analysts predict that C3 will continue to operate at a loss, with many estimating negligible profitability in the foreseeable future.
Valuation isn't Heath's only worry, though. He also raises concerns about the potential overestimation of C3's sales projections for fiscal years 2026 and 2027, given that the growth of subscription revenue, excluding initial license fees, has declined to -1% year-on-year in the recent second quarter.
Should we sell C3 stock?
Essentially, Heath suggests that despite the company's status as a supposed growth stock, C3's weakening subscription revenue, coupled with ongoing losses, and doubts about its recently expanded contract with Microsoft have led KeyBanc to conclude that investors are overvaluing C3 stock.
Considering C3's history of losses and the general consensus among analysts that this trend will persist for the foreseeable future, it seems the investors offloading their C3.ai shares today are making an astute decision: C3.ai stock is a sell.
Given Heath's analysis, investors might want to reconsider their approach towards C3.ai, as the high valuation of its shares compared to its AI peers and the company's persistent losses make it an attractive candidate for selling, especially considering KeyBanc's downgrade. Moreover, the potential overestimation of C3's future sales projections and the decline in subscription revenue could indicate a need to manage one's finance and investments wisely in relation to the company's stock.
