This AI stock struggled against broader market forces ahead of its quarterly earnings report.
Shares of C3.ai (AI 1.22%) fell 12.8% in August, according to data provided by S&P Global Market Intelligence. The stock slumped ahead of its quarterly earnings report as investors adjusted their expectations for AI software.
August started out tough for AI stocks
AI stocks showed weakness across the board in the first week of August. The likes of Microsoft (MSFT 0.17%), Alphabet (GOOG 0.39%) (GOOGL 0.38%), Nvidia (NVDA -1.95%), and Palantir (PLTR 2.02%) all moved sharply lower during the first seven days of the month. C3.ai dropped 12.5% during that time.
The popular AI stocks were struggling against macroeconomic pressures. Weak economic data sparked fears around the world about recession risk. Investors applied skepticism to their growth forecasts, especially for AI stocks that rose to expensive valuations over the previous two years.
When risk appetite goes away, hyped tech stocks tend to struggle. C3 is caught up in the momentum of its industry, so macro forces weighed heavily on the stock in the first week of August.
The industry clawed back some of those losses in the second week of the month. Palantir posted a record quarter that beat analyst estimates for sales and earnings. The company's commentary on demand for AI software fueled optimism for the industry as a whole, which provided a welcome reversal of the downward pressure.
The rally continued after Federal Reserve Chairman Jerome Powell indicated that interest rate cuts were likely later this year. Lower rates encourage investor risk and should relieve pressure on macroeconomic growth. With recession fears making financial headlines, the prospect of imminent rate cuts was great news for equity valuations, especially growth stocks. C3.ai didn't completely erase its previous monthly losses on this bounce, but some damage was undone.
Market dynamics sent C3.ai lower ahead of its September earnings call
Unfortunately, conditions deteriorated again to close out the month. Some of the decline looks to have coincided with other AI stocks, but the late-August swoon marked a departure, with C3 dropping more than its peers.
The company reported earnings in the first week of September, so the late-August moves likely signaled a wave of investors looking to reduce exposure to the stock ahead of that important news. It's common for stocks to become volatile ahead of earnings reports, and that's especially true for growth stocks that might be dealing with whispers from an investor community that is hearing negative rumors.
C3 reported better-than-expected revenue and earnings, supported by 21% top-line expansion. Wall Street's forecasts and recommendations were mostly unchanged. However, several high-profile analysts reduced their price targets. Taken together, this is convincing evidence that analysts are building in some wiggle room as momentum cools for AI stocks. Real-world demand for AI software might not be robust enough to support the hype in the stock market.
C3.ai delivered results that were good but not great, which wasn't enough to prevent some losses. The stock's price-to-sales ratio was just under 10 at the start of August, and it has since tumbled to 8.
Investors are in the midst of housekeeping as they adjust expectations for the AI industry, and C3 was a victim of that adjustment in August despite generally positive news throughout the period.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Ryan Downie has positions in Alphabet, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends C3.ai and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
