C3.ai Stock (NYSE:AI) Could Have Further To Fall: Price Target Slashed In Half on Growth Concerns

C3ai Inc. (NYSE:AI), a player in the enterprise artificial intelligence software space, is facing increased scrutiny after Morgan Stanley slashed its price target on the stock in half. The analyst's revised outlook reflects concerns over the company's recent financial performance and future growth prospects.

The stock is under pressure following Morgan Stanley analyst Sanjit Singh's decision to cut the firm’s price target on C3.ai from $22 to $11, while maintaining an “Underweight” rating.

This adjustment was prompted by C3.ai's first-quarter results, which revealed a 19% year-over-year decline in revenue and an 82% decrease in operating margin. The analyst cited these results as the primary drivers for the downward revision, indicating a lack of confidence in the company's growth trajectory. Year-to-date, the stock has fallen 54.6%.

This downgrade is not an isolated event, as analysts have been expressing reservations about C3.ai's financial health for some time. Strategic investments aimed at capitalizing on AI opportunities had further revised profitability expectations, raising questions about the company's valuation relative to its peers.

While C3.ai has secured strategic partnerships, such as the three-year extension with Baker Hughes, and reported a revenue growth of over 26% in the fourth quarter, analysts remain skeptical about the sustainability of its growth. Concerns have been raised about the company's revenue mix, which includes a high proportion of demonstration licenses and services revenue. This composition raises questions about the long-term viability of C3.ai's revenue streams.

Furthermore, analysts have voiced concerns about C3.ai's valuation and profitability. The company's transition from a subscription-based to a consumption-based revenue model is viewed as a gradual process that may encounter challenges. The company's lack of profitability and competition from established players like Palantir and Salesforce have been highlighted as significant hurdles. The company's high forward price/sales and enterprise value/sales ratios, compared to sector medians, suggest a potential overvaluation, adding to investor apprehension.

The halving of C3.ai's price target by Morgan Stanley underscores the ongoing concerns about the company's financial performance, revenue composition, and strategic direction. While partnerships and reported revenue growth offer some positive signals, the challenges associated with revenue model transitions, profitability, and market competition contribute to a cautious outlook.

Already down 54.6% YTD, the revised price target indicates a perceived downside of 30% from here.