Why Is C3.ai (AI) Stock Rocketing Higher Today

Petr Huřťák /
2024/05/30 11:21 am EDT

What Happened:

Shares of artificial intelligence (AI) software company C3.ai (NYSE:AI) jumped 14.3% in the morning session after the company reported a "beat and raise" quarter. Revenue, gross margin, and free cash flow all exceeded expectations in Q1. The company called out some factors that highlighted its strong positioning in the AI space, including 1. Improved customer traction as companies expand their use of its products. 2. Strength in the US Federal Market with more than 100% revenue growth in 2024. 3. Significant demand for generative AI products, with the company receiving almost 50,000 inquiries for its Generative AI applications in Q4. 

As a reminder, the business is transitioning to a consumption-based pricing model, which makes it harder to infer insights from key topline indicators, including remaining performance obligations (RPO - leading revenue indicator), which is expected to continue to decline in the coming quarters. The company noted that the transition process is still in the early days, which raises the potential for more uncertainty in forecasting growth in the coming quarters. 

Moving on, C3.ai expects revenue growth to accelerate next year with full-year revenue guidance that was raised and above expectations. Overall, we think this was a really good quarter that should please shareholders.

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What is the market telling us:

C3.ai's shares are very volatile and over the last year have had 51 moves greater than 5%. But moves this big are very rare even for C3.ai and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The biggest move we wrote about over the last year was 3 months ago, when the stock gained 24.8% on the news that the company reported third-quarter results that exceeded analysts' revenue, free cash flow, and EPS estimates. Revenue for the next quarter also came in roughly in line with expectations, while the full-year revenue guidance came in slightly ahead. The results showed that the company's transition to a consumption-based model is going as planned despite the anticipated short-term headwinds to remaining performance obligations (RPO - leading revenue indicator). Due to the anticipated headwinds, RPO and billings fell below expectations during the quarter. 

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. 

Moving on to the profit line, the company expects margin headwinds due to ongoing investments in generative AI and customer migrations to its new platform. 

Lastly, the company provided an encouraging update on the AI front, adding, "In Q3, we closed 17 generative AI applications pilots ..." The company also provided an example of how some of its generative AI products are being adopted, citing DL Piper, which "applied C3 Generative AI to reduce the attorney time it takes to create over 200 point due diligence analyses of limited partner agreements, and it reduced the effort by 80%." Overall, this quarter's results were positive.

C3.ai is down 5.2% since the beginning of the year, and at $27.28 per share it is trading 41.2% 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 $294.73.

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