Why C3.ai Stock Is Sinking Today

C3.ai (NYSE: AI) stock is seeing sell-offs in Wednesday's trading. The software and consulting specialist's share price was down 4% as of 1:20 p.m. ET today. Meanwhile, the S&P 500 index had fallen 0.6%, and the Nasdaq Composite index was down 1%.

C3.ai's valuation pullback is being driven by news surrounding DeepSeek R1, a potentially disruptive new artificial intelligence (AI) model from a Chinese company that debuted last week. AI stocks are losing ground again today as investors weigh the potential implications of the technology and escalating tensions between China and the U.S., and the tech specialist is participating in the pullback.

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C3.ai stock pulls back again on DeepSeek and China concerns

C3.ai kicked off this week's trading with DeepSeek related sell-offs on Monday, but it saw rebound momentum in conjunction with gains for the broader market yesterday. Now, the stock is seeing another round of pullbacks as investors continue attempts to decipher the implications of the new Chinese AI model.

According to some reports, DeepSeek's R1 was created and trained with far less advanced hardware than OpenAI's most powerful ChatGPT system. The Chinese system is said to require far less processing power and cooling than other comparable AI systems, and the company is selling upgraded commercial services at a small fraction of what OpenAI is charging for its most advanced ChatGPT software.

R1 has also raised broader concerns about the U.S. competitive positioning against China in AI. Today, according to Fox News, Sen. Josh Hawley, a Missouri Republican, proposed new legislation that would ban U.S. investment in Chinese AI companies and cut all development cooperation between the countries. While there's no clear indication that Hawley's bill will actually become law, it highlights some precarious valuation dynamics for AI companies, including C3.ai and the market at large.

What comes next for C3.ai?

Even if DeepSeek's new AI system does wind up representing a major breakthrough in AI technologies, it's not necessarily clear that it will be a negative for C3.ai. For instance, Oppenheimer recently published a research note on the new artificial intelligence model that listed C3.ai as a potential beneficiary if the new software winds up bringing a paradigm shift in AI processing and execution.

Companies that have been focused on AI infrastructure, including Nvidia and Microsoft, could see significant headwinds, but Oppenheimer's analysts think that businesses focused on application development could wind up benefiting. Lower AI processing costs stand to be a significant boon for software creators, and it's possible that major leaps forward in efficiency could dramatically improve C3.ai's cost structure and open up new development opportunities.

On the other hand, investors should keep in mind that there's still a lot about DeepSeek's new AI system that isn't known -- and markets may be overreacting to largely unsubstantiated reports or details that only show part of the bigger picture.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Nvidia. 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.