C3.ai: What's Behind the Stock's Surge in the Past 3 Months?

Shares of tech company C3.ai (NYSE:AI) finished the month of October at $11.85 -- far higher than the $9.18 they were at three months earlier, at the close of July. That's a near-30% rally over three months, and it would have been even higher had it not been for the recent sell-off in the tech sector. Over that time frame, it's even outperformed chip giant Nvidia, whose shares have risen by just 2%.

Why has C3.ai stock suddenly gotten so hot, and could its rally continue?

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No clear catalyst for the stock's rally

There hasn't been a big development for C3.ai in recent months that would explain its impressive rally. Even its most recent earnings numbers weren't impressive. At $52.4 million in revenue for the period ending July 31, the company's top line was down 25% compared to the previous year. And it still incurred a significant net loss of $92.8 million.

The company, which sells artificial intelligence (AI) applications, simply hasn't demonstrated strong demand for its products and services, at a time when demand should be red hot, as it has been for many other tech businesses.

Over the past five years, however, the stock is down a mammoth 74%, and C3.ai's recent rally may have more to do with investors loading up on the stock amid a low and hoping for a turnaround with its CEO Tom Siebel back at the helm. Siebel resigned a year ago due to health reasons, but ultimately ended up returning in May.

The stock's valuation may appear low, but that doesn't mean it's worth buying

C3.ai has a market cap of $1.9 billion, and its valuation may seem low as it trades at around seven times its trailing revenue. But with choppy sales numbers and its bottom line well into the red, I don't see a reason to be bullish on the company's future, either in the short term or the long term.

Even under Siebel, the company faced challenges in growing its operations consistently, and a path to profitability was questionable. While the situation got worse after Siebel left the company, investors shouldn't assume that the path ahead will be a much better one.

There's growing competition in AI these days, and it may inevitably end up being more difficult for C3.ai to compete and grow its business without incurring losses. I'm not optimistic that the stock will go much higher, as it's still a fairly risky investment to own. Investors may be better off taking a wait-and-see approach.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.