Why short-seller allegations for AI stocks don’t change the story

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Shares of enterprise artificial intelligence and machine learning company C3.ai (NYSE:AI) are no stranger to volatility, and AI stocks are back to make wild moves until present this month.

After briefly returning to low $30 per share, thanks to a new ‘AI craze’, C3.ai slumps once again, this time due to alleged accounting irregularities by a short seller . These allegations were enough of a red flag to send AI back to the low $20 per share.

With the company’s response to the allegations, the shares found some support. The question now, however, is whether these allegations, which I will discuss later, change history with this highly publicized growth game.

My opinion? No, at least for now. It may be best to take them with a grain of salt instead.

Kerrisdale Capital goes on the offensive

On March 6, Kerrisdale Capital, a hedge fund that shorted C3.ai shares, released a brief report outlining its bearish case.

This report mainly argued that the company was presenting itself in a false light, to generate enthusiasm among retail investors. To back up his point, Kerrisdale cited C3.ai’s history of jumping on trends, as well as its choice of AI as a ticker symbol.

However, although the AI ​​stock fell after the release of this report, it did not have a lasting impact. After all, stocks ripped in late March and early April. Although not certain, this latest rally may have been a factor in Kerrisdale Capital’s decision to publicly criticize C3.ai once again on April 4.

That day, Kerrisdale didn’t reveal another “short report,” but an announcement that she had sent a letter to C3.ai auditor Deloitte and Touche. In the letter, Sahm Adrangi, chief investment officer of Kerrisdale, detailed several alleged accounting and disclosure issues with the accounting firm’s client.

These included allegations about the company’s unbilled receivables, as well as claims that the company miscategorizes income and expenses to give the impression that it is a high-margin software as a service (or SaaS).

Facts versus fears

Falling 26.4% when news of the letter from the auditor first dropped, and another 15.5% the next trading day, the news rattled many AI stock investors. However, did these fair-weather fans make a wise choice, or did fear, uncertainty and doubt get the better of them?

While Kerrisdale’s allegations warrant further investigation, unless further details emerge to support the claims, I would say the latter. So far, C3.ai has only responded to certain allegations. Primarily, a defense of its unbilled receivables practices.

But while the company hasn’t responded to Kerrisdale’s other claims, namely allegations that it inflates subscription revenue, this specific criticism of C3.ai may be short-sighted.

The company is moving to a consumption-based pricing model. This may explain some of the income and expense items that the short seller believes are misclassified.

Moreover, even if C3.ai never becomes a purely SaaS company, that in itself cannot destroy the bull’s case. As the company capitalizes on accelerating adoption of generative AI, strong growth could still soon adapt it to consistent profitability, even at relatively lower margins.

The verdict

Kerrisdale has garnered a high level of attention with her public campaign against C3.ai. However, this short seller’s arguments have not quite destroyed the bull’s case yet.

That said, aside from the possibility of more information coming to light regarding these claims, other risks remain with this popular AI game.

The company still has a lot to prove. Only time will tell if the launch of its C3 generative AI product suite does the trick, re-accelerating revenue growth, driving a shift to non-GAAP profitability. CEO Thomas Siebel believes this is achievable in the coming fiscal year (ending April 2024).

Yet, even with longstanding and emerging risks/concerns, you don’t necessarily have to stay away from AI stock. This last wave of weakness may give you the opportunity to start building a position.

AI stocks get a B grade in Portfolio Grader.

At the date of publication, Louis Navellier has no (neither directly nor indirectly) other positions in the securities mentioned in this article.

The InvestorPlace research staff member primarily responsible for this article has not held (directly or indirectly) any position in the securities mentioned in this article.

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