What’s behind the drop in C3.ai shares?

C3.ai Inc. shares on the New York Stock Exchange lost nearly 30% this week following a “criminal” short-seller’s “criminal” onslaught. This was recently stated by the company’s CEO, Tom Siebel, who had harsh words for the strategy that sent its shares plummeting.

In an interview with Bloomberg, the businessman described as “criminal” the letter from Kerrisdale Capital accusing it of inflating its results. Stock market manipulation is considered a crime by U.S. regulators. In that sense, the aforementioned short seller would have been at fault, according to Siebel.

In the executive’s words, the letter pointing to his company’s dishonest accounting “has no real words in it.” On the contrary, he continued, it is a creative way to manipulate the market. He regretted that such strategies affect companies that are providing solutions to entire branches of business.

It should be taken into consideration that the software business comes with a colossal momentum thanks to the demand for tools such as ChatGPT. Dozens of companies have approached its services as a way to catch up with that new development. The result has been more than positive for C3’s public revenue.

Low blow to C3.ai’s shares

Whether Kerrisdale’s allegations are true or not, they caused C3.ai’s stock to plummet. Specifically, the short-seller’s CFO, Sahm Adrangi, allegedly found a weakness in the company’s trading movements and exploited them. In that case, the reported revenue from service sales would have been higher than the company’s actual sales.

Of course, this strategy allowed Kerrisdale to profit handsomely from the drop in the software firm’s stock. Although this form of financial trading is perfectly legal, the measures applied by many “shorters” to take advantage of the misfortune of other companies are not always well regarded. In many cases, traders even use unethical practices such as dirty wars.

It is worth mentioning that market manipulation, i.e. lying so that panic causes massive stock sales, is one of the illegal moves. This is precisely what Siebel accuses the short-selling firm of doing. By providing inaccurate data and profiting from this in terms of profits, the firm would have committed irregular market manipulation, in his view.

Siebel claimed in the interview that Kerrisdale made between $100 million and $200 million from his short position. “I mean the guy succeeded, sometimes crime pays,” he said. He went on to assure that this shorter is under investigation by regulators. As for Adrangi, he did not confirm any profit or loss from the fall of C3.ai shares.

By the end of 2022, shares of the AI-focused company were hovering around $12 each. With the mood surrounding the AI tools, they explored to a high of $34.68 per share last April 03. A day later, the stampede occurred and the shares bottomed out on April 6 at $20.40. During that same day they managed to stop the losses at $22.84.

Kerrisdale denies problems with authorities

The short-seller company denied that it had any problems with the authorities, as claimed by the CEO of C3.ai. However, Bloomberg claims that it is in a group of 30 companies under investigation by the Department of Justice. The reason for this would be the practice of possible commercial abuses. Earlier this year, Adrangi stated that they had not been contacted by any government agency about alleged malpractices.

In any case, the letter that triggered the recent episode last Tuesday was forceful against C3’s business model. This business would be oriented towards consulting at a lower margin than the company had disclosed to the authorities. It also pointed to the increase in unbilled receivables from its largest client, Baker Hughes Co. as a red flag to investors.

Siebel said that 80% of his company’s revenue comes from software sales, with consulting taking up a small portion. On the other hand, he added that unbilled receivables are commonly found at peers such as Salesforce and International Business Machines Corp. The day after the letter, C3 stressed that unbilled receivables are “a straightforward accounting issue that has been fully disclosed.”

The same response stated that the gross margin related to the Baker Hughes deal was never disclosed. This means that Kerrisdale’s claim that it comprises 99% of the gross margin is completely false.

Despite C3.ai accusing its rival of lying for profit, the fall of its shares was inevitable. In that sense, therein would lie the “criminal” action of the short seller. For Siebel, it is a matter of time before the company becomes a fast-growing one in the AI sector.

The worst for C3 is yet to come

But the shorter’s misstep may not be the worst of C3’s woes. Although this episode cost it a near 30% drop, its year-to-date earnings remain doubled. The pause of the labs developing AI could be the worst-case scenario for this and other companies firmly linked to that development.

Last week it became known that a letter from a group of experts (now more than 10,000) called for restraint in AI. Thus, the letter asks that all developments of this technology be stopped for a period of 6 months in order to carry out a public audit. According to the signatories, including Tesla CEO Elon Musk, an AI superior to GPT-4 represents a danger to civilization.

The experts stress that if the labs do not pause voluntarily, the authorities should take action. In such a scenario, C3.ai shares would be among the first to be affected. It is important to take into consideration that AI investments are not directly listed on the stock exchange. In other words, exposure is through companies with AI labs. These companies include Microsoft and Alphabet.

As such, C3 becomes one of the few hard indirect investor exposures to that technology. This is a strong correlation that could suffer enormously in the event of a hypothetical pause. With this, what some analysts call AI hype would claim its first victims in the company that sells AI-based enterprise software solutions.

Broadly speaking, the stock would go to the floor because of the loss of the company’s potential in the event of the pause in developments. Even if that potential were not affected, at least the investors’ view that there are problems would be enough to hit the stock’s shares.