Why Is C3.ai (AI) Stock Soaring Today
What Happened:
Shares of artificial intelligence (AI) software company C3.ai (NYSE:AI) jumped 24.8% in the morning session after 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.
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What is the market telling us:
C3.ai's shares are very volatile and over the last year have had 67 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 previous big move we wrote about was 23 days ago, when the company gained 5.7% on the news that peer, Palantir reported fourth-quarter results with expectations for revenue growth to accelerate in the next fiscal year, highlighting growing demand for artificial intelligence solutions. Palantir's revenue, billings, and free cash flow exceeded Wall Street's expectations in the quarter, and its gross margin improved. Notably, Palantir's US commercial business significantly contributed to the solid performance during the quarter, as revenue in the segment grew 70% year on year and 12% sequentially. Looking ahead, Palantir expects the US commercial business to grow at least 40% in 2024. Overall, the results highlight the potential in the AI market, which picked up momentum in 2023. Palantir's guidance suggests it is still early days in the AI space, with the likes of C3.ai expected to benefit from the expanding market opportunity.
C3.ai is up 28.7% since the beginning of the year, but at $36.89 per share it is still trading 20.4% 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 $399.83.
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