Why C3.ai (AI) Shares Are Getting Obliterated Today

Adam Hejl /
2023/12/29 12:49 pm EST

What Happened:

Shares of artificial intelligence (AI) software company C3.ai (NYSE:AI) fell 5.4% in the afternoon session after the market took a breather with no obvious reason behind the broad-based weakness. Investors likely took profits following a strong finish to the year. 2023 has been splendid for the market, with the S&P 500 up nearly 25%. The year began with a surge in technological advancements, propelling the tech sector to new heights. Companies pioneering in artificial intelligence experienced a renaissance, capturing the attention of investors and driving substantial gains. Not all sectors, however, flourished equally. Traditional industries like consumer durables faced headwinds as consumers reeled in large expenditures, prompting a wave of restructuring and strategic realignment. 

More recently, the market has surged over the last two months. Inflation has come in below expectations, prompting the Federal Reserve to pivot from a hawkish to a doveish stance--it is now projecting interest rate cuts in 2024, a tailwind for stocks as it lowers the discount rate applied to future cash flows. As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy C3.ai? Access our full analysis report here, it's free.

What is the market telling us:

C3.ai's shares are very volatile and over the last year have had 74 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. The previous big move we wrote about was 10 days ago, when the company gained 10.8% on the news that reflecting the broader market's ongoing uptrend, which some may playfully call the Santa Claus rally (a real observed phenomenon where the market tends to drift upwards during the holiday season for reasons such as optimism and year-end tax considerations for funds and investors). All major indices rose, fueled by growing optimism about the Federal Reserve not only concluding its rate hikes but cutting in 224. Easing inflation has been the catalyst for this change in tone from the Fed. During the December 2023 Fed meeting, committee members signaled for at least three quarter-point rate cuts in 2024, roughly aligning with market expectations but more accommodative than Fed officials' previous statements. This has set the stage for a soft landing scenario, where inflation comes under control without damage to the economy that could hurt overall consumer demand. As a reminder, lower rates are good for stock valuations, especially for tech companies where the market needs to discount back cash flows further out in the future. When the math is done to discount these cash flows back to today, a lower assumed discount rate leads to higher present values.

C3.ai is up 160% since the beginning of the year, but at $28.77 per share it is still trading 38% below its 52-week high of $46.37 from June 2023. Investors who bought $1,000 worth of C3.ai's shares at the IPO in December 2020 would now be looking at an investment worth $310.84.

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