Microsoft Deal Boosts C3.ai, but Earnings Doubts Linger

The enterprise AI stock has rocketed higher, breaking the trend for the year, but the question remains whether the company's earnings will substantiate the recent gains.

AI Roller Coaster

C3.ai has experienced a tumultuous year, with its share price fluctuating significantly in both directions by over 30%. Slow sales growth guidance earlier in the year delayed an initial attempt at a strong move higher, leading to a prolonged sideways trading period. However, C3.ai recently announced a partnership with Microsoft to integrate its Enterprise AI on Azure. While the financial terms of the deal were not disclosed, the deal positioned C3.ai as Microsoft's preferred generative AI provider, creating a "tricky" situation, as described by one analyst.

The partnership is expected to be beneficial in the long term, but concerns persist around the company's ability to generate sufficient subscription revenue to justify the improved share price in the short term. Analysts expect a slight decrease in C3.ai's earnings to -$0.16 per share when it reports its fiscal second-quarter results on Monday, compared to -$0.13 per share in the previous year. While sales are projected to increase by 24% to $91 million, this is lower than the recent surge in the stock price.

Adding to the trickiness is that analysts have yet to revise their outlook for the company since the Microsoft deal, with the average price target remaining at $25.55 per share, significantly lower than the current price of over $37 per share. This scenario bears a resemblance to a previous instance when the company's share price reached a similar range and subsequently reversed following its earnings report.​

Good News is Bad News for Gold

The company's share price has been drifting higher in line with other software firms, increasing its valuation before the risk event. However, the improving metrics in the sector might help restore investor confidence in AI's ability to generate profits. While large tech firms have invested billions in AI, AI venture companies have struggled to achieve profitability.

C3.ai is no exception to this trend; as its revenue has grown over the years, so have its losses. Investors might accept losses, especially if the company generates increased sales and can implement measures to improve its profit margin. However, if C3.ai does not provide concrete measures to show its ability to achieve profitability, the recent bump up in the stock could fade, especially if the company's sales forecasts for the rest of the year do not impress investors. The company previously projected total revenue for the year to be in the range of $370-395 million and is expected to provide guidance for its third-quarter earnings.​

C3.ai Eyes June 2023 High

The stock of C3.ai might have ended a bullish terminal wedge pattern down at $18, suggesting an upside move towards $45 and potentially the June 2023 high of $49. If the stock loses its short-term $35-$40 range to $33, however, a break below its $30 could lead to a further decline towards $23 and the wedge low of $18.​

Source: SpreadEx / C3.AI

C3.ai has surged recently, but concerns remain over whether its earnings can justify the gains. Its recent partnership with Microsoft to integrate its Enterprise AI on Azure boosted its share. However, analysts expect a slight decrease in its upcoming earnings, with lower-than-expected sales growth than the stock has surged recently. Also, analysts have yet to revise their outlook following the deal, with the average price target much lower than the current price. The recent stock bump could fade if C3.ai fails to provide concrete measures to achieve profitability and impress investors with its sales forecasts.