The Paradox of C3.ai, Inc. (AI): Why Are Short Sellers Betting Against a Market Leader?
We recently published a list of 10 Worst Small Cap AI Stocks To Buy According to Short Sellers. In this article, we are going to take a look at where C3.ai, Inc. (NYSE:AI) stands against other worst small cap AI stocks.
The September Interest Rate Cut
Analysts have been anticipating interest rate cuts for a while now, with bets on either a 25- or a 50-basis point reduction. Concerns about potential economic instability and the impact of these cuts on net interest income for banks added complexity to the market outlook. However, the situation was sorted when the Fed cut interest rates by 50 basis points on September 18 this week, marking its first easing of monetary policy since the pandemic began.
This reduction was prompted by growing concerns about the labor market’s health. Following this decision, the Fed’s benchmark rate now stands at a range of 4.75% to 5.0%.
The Fed’s Summary of Economic Projections indicates that policymakers anticipate further cuts, with expectations of a half-point reduction by the end of this year, an additional full percentage point in 2025, and another half-point cut in 2026, ultimately targeting a range of 2.75% to 3.00%. Fed Chairman Jerome Powell stated that the projected rate cuts are not urgent and that the timing for easing is appropriate.
As political dynamics unfold ahead of the presidential elections in November, Powell emphasized that monetary policy decisions are based solely on data and economic outlooks rather than political considerations.
While a lot of analysts suggested that a 50 basis-point rate cut could be an over-exaggeration, Erika Najarian, UBS senior equity research analyst, just earlier this week, mentioned that small- and mid-cap stocks could benefit from a 50 basis-point cut. We talked about this in another one of our articles, 16 Best Mid Cap Growth Stocks To Buy Now, here’s an excerpt from it:
“Najarian attributes the recent underperformance of financial stocks to market concerns about the implications of potential rate cuts for economic stability, leading investors to question a less favorable economic outlook. She believes some anticipated cuts may already be reflected in money center bank stock prices due to their strong year-to-date performance. A 50 basis point cut could especially benefit mid-cap stocks affected by commercial real estate issues.
She explains that a 50 basis point cut would significantly impact net interest income. Money center banks benefit more from rising rates, while mid-caps are liability-sensitive and may see deposits repriced faster, favoring them if rates are cut aggressively…. She points out that banks must choose between cutting rates to remain competitive or maintaining volume, complicating forecasts for net interest income.”
Right after the Fed’s announcement, Mark Avallone, president at Potomac Wealth Advisors, discussed his reaction to the Fed’s 50 basis-point rate cut, considering the recent financial market fluctuations sparked by this decision. The move led to a volatile trading session, with the Dow Jones Industrial Average initially reaching all-time highs before briefly turning negative. By the end of the session, the Dow was up 188 points, while the S&P 500 rose by half a percent and the NASDAQ climbed approximately 0.8%.
Mark Avallone expressed surprise at the Fed’s decision but emphasized that investors shouldn’t make impulsive decisions, but rather utilize potential opportunities in small and mid-cap stocks, which he believes will benefit from a lower interest rate environment. He noted that these stocks are currently valued at about 50% of the forward price-to-earnings ratio compared to large-cap stocks, making them an attractive investment option.
Avallone warned investors to be cautious with traditional banks, especially mid-sized and large ones, based on his experience at Bank of America. He believes that the recent changes in loan pricing after the Fed’s rate cut would hurt banks’ overall revenue and income from interest. Since deposit rates are likely to stay high due to competition from non-bank financial companies and money market funds offering attractive rates above 5%, traditional banks might find it hard to stay profitable.
He suggested that it may be too late for significant moves in fixed-income investments, as many investors have already lengthened their bond durations. He recommended pausing further adjustments until it’s clear whether the rate cut is due to an economic slowdown or a preemptive action.
So, while the Fed’s interest rate cut has created uncertainty in the markets, Avallone’s analysis highlights specific sectors and strategies that could offer potential growth amid these challenges. With that context, we’re bringing you a list of the 10 worst small-cap AI stocks to buy according to short sellers to short sellers.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A computer engineer debugging a complex AI application on a powerful workstation.
C3.ai Inc. (NYSE:AI)
Short % of Shares Outstanding As of August 30: 22.31%
Market Capitalization as of September 14: $2.96 billion
Number of Hedge Fund Holders: 18
C3.ai Inc. (NYSE:AI) is an enterprise AI company that provides software and services to help businesses solve real-world problems by integrating AI into their operations. Offerings include a comprehensive AI suite, pre-built AI applications, and consulting services, empowering businesses to increase efficiency, reduce costs, improve decision-making, and gain a competitive edge through AI-driven solutions.
The company started the first quarter of fiscal 2025 with a revenue of $87.21 million, recording a 20.52% improvement from FQ1 2024, exceeding all expectations. The loss per share was $0.05, lower than $0.11 in the previous quarter. Subscription revenue alone was $73.5 million, up 20% from a year ago.
The fiscal first quarter ended with 71 closed agreements, including 72 new pilots marking a 117% year-over-year increase in the pilot count. C3.ai Inc. (NYSE:AI) also signed new agreements with GSK, Eletrobras, Valero, Swift, SmithRx, Sanofi, government agencies, and others. It expanded its footprint in state and local government, signing 25 agreements in various states.
It formed 51 new partnerships this quarter, with 72% of agreements closed through the partner ecosystem. The partner-supported bookings grew 94% year-over-year. It closed 40 agreements with Google Cloud, a 300% increase.
C3.ai Inc. (NYSE:AI) has a first-mover advantage in the enterprise AI market. As AI value seems to be shifting from hardware to software, this company’s long-term growth prospects improve. Analysts and hedge funds consider it a leading AI stock due to its strong market position and successful execution.
Bireme Capital stated the following regarding C3.ai, Inc. (NYSE:AI) in its fourth quarter 2023 investor letter:
“Our final new short position is in a company called C3.ai, Inc. (NYSE:AI). Originally named “C3 Energy,” C3.ai has changed its name multiple times based on whatever hot new trend they were supposedly capitalizing on. The “energy” theme was about smart grid and cap-and-trade. Then the firm changed its name to “C3 IoT” to attempt to capitalize on the Internet of Things buzz. After that trend fizzled out, the moniker was altered once more, with the company capturing the “AI” ticker in December 2020 – a savvy move if it wants to sell stock to credulous investors, but irrelevant to its business prospects. As Kerrisdale put it, the company is a “minor, cash burning consulting and services business masquerading as a software company.”
Overall, AI ranks 2nd on our list of 10 Worst Small Cap AI Stocks To Buy According to Short Sellers. While we acknowledge the potential of AI as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.