Is C3.ai Stock a ChatGPT Artificial Intelligence Play?

Key Points

• C3.ai has a $250 million artificial intelligence (AI) contract with Microsoft, backing ChatGPT creator OpenAI.
• C3.ai provides enterprise AI services to Google Cloud and the U.S. Department of Defense, U.S. Department of Energy, the U.S. Air Force, and the U.S. Department of Health and Human Services.
• Subscription revenue continues to grow at 26% YoY while revenues are growing at 7% YoY.
• Consumption-based pricing model will make it easier to land new clients in a weakening economy and scale up as they use more services.

You've seen the headlines about the artificial intelligence (AI) platform ChatGPT being able to write term papers and articles in a matter of minutes. 2023 looks to be shaping up as the year of AI, thanks to the mainstream frenzy over platforms like ChatGPT.

After initially investing $1 billion, Microsoft Inc. NASDAQ: MSFT is considering investing an additional $10 billion into parent company Open.AI.

ChatGPT is also backed by Tesla Inc. NASDAQ: TSLA CEO Elon Musk. The platform gained over a million users just five days after its launch. This has caused Alphabet Inc. NASDAQ: GOOGL investors concern that Google Chrome may face serious competition with AI platforms that can go beyond just searching and creating content, programs, poetry, articles, marketing materials, and conversations.

About C3.ai

The spotlight on AI is a boon to enterprise AI companies like C3.ai Inc. NYSE: AI, which provides AI and internet of things (IoT) platforms enabling companies to customize and integrate AI and IoT applications at scale. C3.AI provides over 42 customizable pre-built applications for the healthcare, manufacturing, aerospace, chemicals, oil and gas, and energy industries, as well as for governments.

Incidentally, they have a $250 million contract with Microsoft and also work with Google Cloud. Amazon.com Inc. NASDAQ: AMZN AWS remains its most extensive installed base. Shares have decreased dramatically since their post-IPO highs of $183.90 on Dec. 1, 2020.

Breakout of Weekly Descending Triangle

AI shares have been in a weekly descending triangle since peaking at $23.58 in August of 2022 to put in a swing low bottom and triangle lower trendline at $10.16. The weekly stochastic has been suppressed under the 20-band oversold line since September 2022.

After triggering the weekly market structure low (MSL) buy signal on the $11.54 breakout, shares were above to test the falling trendline at $13.02 in early January.

The weekly stochastic mini pup bounce through the 20-band enabled AI shares to breakout through the falling triangle trendline on a second MSL trigger at $13.02. Shares overshot the weekly 20-period exponential moving average (EMA) resistance at $13.49, followed by the weekly 50-period MA resistance at $16.81.

This may be shaping up for more important follow-through if shares can hold above the second MSL trigger level. Pullback support sits at the $13.02 MSL trigger, $12.65, $11.54 MSL trigger, $10.60, and $10.16 swing low.

Consumption-Based Pricing Model is Right for the Economic Climate

The Company has transitioned from a subscription-based to a consumption-based pricing model. This enables the Company to close new clients easier since there isn't a multi-million dollar upfront cost.

The smaller investment enables Companies to be onboard more accessible during harsh economic climates where tech companies are laying off thousands of employees at a time. It provides more effortless closing of new clients and longevity and scaling of existing clients.

Competitive Advantage

What sets C3.ai apart from competitors is its flexibility to operate with the most complex enterprise software applications. The Company competes with UiPath Inc. NYSE: PATH, Palantir Technologies Inc. NYSE: PLTR, and International Business Machines Corp. NYSE: IBM.

It has various government contracts with the U.S. Department of Energy and the U.S. Department of Health and Human Services. It also has a $500 million five-year transaction agreement with the U.S. Department of Defense. Some of their well-known publicly traded clients include Exxon Mobil Corp. NYSE: XOM, Pfizer Inc. NYSE: PFE, and insurance giant American International Group Inc. NYSE: AIG.

Earnings Beat

On Dec. 7, 2022, C3.ai released its fiscal second-quarter 2023 results for the quarter that ended in October 2022. The Company reported an earnings-per-share (EPS) loss of (-$0.11) versus a loss of (-$0.16) consensus analyst estimates, an $0.05 beat.

Revenues grew 7.1% year-over-year (YoY) to $62.41 million, beating analyst estimates of $60.81 million. Subscription revenues grew 26% YoY to $59.5 million. GAAP profit was $41.7 million indicating a 67% gross margin.

The remaining performance obligations (RPO) were $417.3 million. The Company had $858.8 million in cash and cash equivalents. Completed contracts rose 100% to 25, with an average contract size of $800,000, down from $19 million annually due to the new pricing model, which will increase smaller transactions.

Downside Guidance 

C3.ai provided fiscal Q3 2023 revenue guidance in line, coming in between $63 million to $65 million versus $66.82 million consensus analyst estimates. The Company sees fiscal full-year 2023 revenues between $255 million to $270 million versus $261.04 million analyst estimates.

C3.ai CEO Tom Siebel commented, “It was a solid second quarter, with subscription revenue growing 26% year over year. We made substantial progress ramping up our consumption-based sales motion effort, which has been well received by our customers, partners, and sales organization. We expect consumption-based sales to substantially contribute to growth in forthcoming quarters.”