C3.ai, Inc.'s (NYSE:AI) 37% Share Price Plunge Could Signal Some Risk

Explore C3.ai's Fair Values from the Community and select yours

C3.ai, Inc. (NYSE:AI) shareholders that were waiting for something to happen have been dealt a blow with a 37% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 33% in that time.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about C3.ai's P/S ratio of 5.7x, since the median price-to-sales (or "P/S") ratio for the Software industry in the United States is also close to 4.8x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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See our latest analysis for C3.ai

What Does C3.ai's Recent Performance Look Like?

C3.ai certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Keen to find out how analysts think C3.ai's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like C3.ai's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 25% last year. Pleasingly, revenue has also lifted 54% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 19% each year over the next three years. That's shaping up to be materially lower than the 37% each year growth forecast for the broader industry.

With this information, we find it interesting that C3.ai is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From C3.ai's P/S?

Following C3.ai's share price tumble, its P/S is just clinging on to the industry median P/S. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Given that C3.ai's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 4 warning signs for C3.ai (1 doesn't sit too well with us!) that we have uncovered.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.