Why C3.ai (AI) Shares Are Plunging Today

Petr Huřťák /
2023/12/07 12:37 pm EST

What Happened:

Shares of artificial intelligence (AI) software company C3.ai (NYSE:AI) fell 10% in the mid-day session after the company reported second quarter with revenue falling below Wall Street's estimates. Despite the substantial growth in generative AI demand, the company identified prolonged decision cycles in many instances. Sales execution challenges in Europe were also highlighted. Furthermore, the ongoing transition to a consumption-based pricing model was acknowledged to have a short to medium-term adverse impact on revenue growth. 

As a quick recap, consumption-based contracts provide customers with enhanced flexibility. Unlike traditional long-term commitments, customers can scale their consumption of the products and features almost real-time. This means that during good times when demand is high, revenue can grow faster than if the company goes to market with a contract model. On the other hand, though, if times are tough or if competition is increasing, customers can scale down usage, and revenue will see headwinds faster than if the company goes to market with a contract model. 

Looking ahead, guidance for next quarter underwhelmed, with its revenue outlook slightly below analysts' estimates and its projected adjusted operating margin missing significantly. Additionally, the company anticipates a long-term drag on RPO (remaining performance obligations, a leading indicator of revenue) due to reduced sales prices and fewer contracts with upfront multiyear commitments stemming from the shift to a consumption model. Overall, this was a weaker quarter for the company, highlighting several challenges.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy C3.ai? Access our full analysis report here, it's free.

What is the market telling us:

C3.ai's shares are very volatile and over the last year have had 73 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The previous big move we wrote about was 17 days ago, when the company gained 5.9% on the shocking news that OpenAI's CEO Sam Altman is leaving the company. According to the Board, Altman's departure "follows a deliberative review process by the board, which concluded that he was not consistently candid in his communications with the board, hindering its ability to exercise its responsibilities. The board no longer has confidence in his ability to continue leading OpenAI." As a result, President and co-founder Greg Brockman announced that he's quitting OpenAI. Subsequently, Microsoft CEO Satya Nadella revealed that Altman and his former OpenAI co-founder, Greg Brockman, are joining Microsoft to lead a new advanced AI research team. This move signals Microsoft's commitment to leading the rapidly growing AI market. The combination of Altman and Brockman's expertise with Microsoft's vast resources could create a formidable force in the AI space. This development shows that AI platforms like C3.ai could be potential acquisition targets of larger tech and internet companies that want to quickly add AI capabilities and talent.

C3.ai is up 134% since the beginning of the year, but at $25.92 per share it is still trading 44.1% below its 52-week high of $46.37 from June 2023. Investors who bought $1,000 worth of C3.ai's shares at the IPO in December 2020 would now be looking at an investment worth $280.25.

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