What Happened?
Shares of artificial intelligence (AI) software company C3.ai (NYSE:AI) fell 6.7% in the morning session as markets continued to struggle following the broad selloff triggered by weak economic data in the previous week. On Friday, February 21, 2025, the S&P 500 dropped 1.7%, and the Nasdaq fell 2.2% after PMI numbers showed the U.S. services sector contracted, and the University of Michigan's consumer sentiment index came in below expectations.
Adding to Wall Street's anxiety, rumors swirled that Microsoft is trimming some data center projects, raising concerns that AI-related investments may get a little too bloated.
TD Cowen analyst Michael Elias flagged three key findings from his research. He noted that Microsoft "1) cancelled leases in the U.S. totaling 'a couple of hundred MWs' with at least two private data center operators, 2) has pulled back on the conversion of SOQ's to leases, and 3) has re-allocated a considerable portion of its international spend to the U.S."
Jefferies analysts see this as more of a regional spending adjustment, adding that Microsoft executives "strongly refute" any major shift in their data center strategy.
Investors' attention now turns to Nvidia's upcoming earnings report, a crucial barometer of AI infrastructure demand. The chip giant's Q4 2024 results and forward guidance will be closely scrutinized for signals on whether AI spending remains strong or is beginning to taper off. With so many moving pieces, investors are bracing for a volatile week ahead, while hoping for clarity.
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What The Market Is Telling Us
C3.ai’s shares are extremely volatile and have had 33 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 12 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 21.2% since the beginning of the year, and at $27.31 per share, it is trading 36.4% below its 52-week high of $42.94 from December 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 $295.28.
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