Why C3.ai (AI) Shares Are Getting Obliterated Today

What Happened:

Shares of artificial intelligence (AI) software company C3.ai (NYSE:AI) fell 19.8% in the pre-market session after the company reported second-quarter earnings results and provided full-year sales and adjusted operating income guidance below Wall Street analysts' estimates. Also, sales were underwhelming against the backdrop of the ongoing AI hype, which likely raised expectations ahead of earnings. Notably, revenue came in ahead by a narrow margin. Overall, it was a mixed yet weaker quarter for the company, with the stock's reaction suggesting the market was likely expecting more.

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What is the market telling us:

C3.ai’s shares are very volatile and over the last year have had 35 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 6 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 29.3% since the beginning of the year, and at $20.32 per share it is trading 45% below its 52-week high of $36.97 from February 2024. 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 $219.70.

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