Shares in enterprise artificial intelligence and machine learning company C3.ai (NYSE:AI) are no stranger to volatility, and AI stock is back to making some wild moves so far this month.

After briefly zooming back to the low-$30s per share, thanks to renewed “A.I. mania,” C3.ai has come tumbling down once again, this time because of the allegations of accounting irregularities by a short seller. These allegations were enough of a red flag to send AI back to the low-$20s per share.

With the company responding to the allegations, shares have found some support. The question now, however, is whether these allegations, which I will discuss further below, change the story with this high-profile growth play.

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

Kerrisdale Capital Is on the Offensive

On March 6, Kerrisdale Capital, a hedge fund that has sold C3.ai stock short, released a short report laying out its bear case.

This report mainly argued that the company was misrepresenting itself, to gin up excitement among retail investors. To back its argument, Kerrisdale cited C3.ai’s history of jumping on trends, as well as its choice of AI as its ticker symbol.

However, while AI stock sank following the release of this report, it didn’t have a lasting impact. After all, shares were on tear during late March and early April. While not for 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 revealed not another “short report,” but an announcement that it has sent a letter to Deloitte and Touche, C3.ai’s auditor. 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 is misclassifying revenue and expenses to give the impression that it’s a high-margin, software-as-as-service (or SaaS) business.

Facts vs. Fears

Dropping 26.4% when the auditor letter news first dropped, and another 15.5% the following trading day, the news rattled many investors in AI stock. However, did these fairweather fans of the stock make a wise move, or did fear, uncertainty, and doubt get the better of them?

While Kerrisdale’s allegations warrant further investigation, unless further details emerge backing up the claims, I would say the latter. So far, C3.ai has responded to only some allegations. Mainly, a defense of its unbilled receivable practices.

But even as the company did not respond to other claims from Kerrisdale, namely allegations that it is inflating subscription revenue, this specific criticism of C3.ai may be short-sighted.

The company is in the middle of transitioning to a consumption-based pricing model. This may explain some of the revenue and expense line items that the short-seller argues are misclassified.

Furthermore, even if C3.ai never becomes purely a SaaS-based company, this by-itself may not destroy the bull case. With the company capitalizing on accelerating adoption of generative A.I., high-growth could still soon scale it to consistent profitability, even if at relatively lower margins.

The Verdict

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

That said, besides the possibility that more comes out regarding these allegations, other risks do remain with this popular A.I. play.

The company still has a lot to prove. Only time will tell whether the launch of its C3 Generative AI Product Suite does the trick, in re-accelerating revenue growth, resulting in a move to non-GAAP profitability. CEO Thomas Siebel believes this is achievable in the coming fiscal year (ending April 2024).

Still, even with longstanding and newly-emerging risks/concerns, you need not necessarily stay away from AI stock. This latest round of weakness may offer you the opportunity to start building a position.

AI stock earns a B rating in Portfolio Grader.

On the date of publication, Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.

The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.