C3.ai Executes a Rope-a-Dope Attack on Sleeping Bears

Key Points

• C3.ai raised its fiscal Q4 2022 guidance ahead of its earnings release on May 31, 2023.
• Shares triggered a short squeeze that spiked its stock by nearly 40%.
• The company has noted that the AI business environment has been the most active since its inception.

Enterprise artificial intelligence (AI) software provider C3.ai Inc. NASDAQ: AI surprised investors by raising its fiscal Q4 2023 earnings two weeks before its release. It sent shares surging 40% higher, taking complacent shorts entirely by surprise. 

The AI spotlight continues penetrating the mainstream as AI giants Microsoft Co. NASDAQ: MSFT and Open.ai's Chat-GPT battle it out with Alphabet Inc. NASDAQ: GOOGL owning Google Bard AI. Google finally released its Bard AI, a large language model (LLM), in beta form on May 10, 2023. It announced plans for a newer, more powerful version to integrate into its ecosystem of services and products, including search.

AI Driving Digital Transformation

Google shares rallied to 52-week highs as shares are up 37% year-to-date. The one-upmanship keeps AI in the spotlight as businesses in every industry act quickly to adopt and integrate it into their operations. AI is driving and accelerating the digital transformation of companies. This has been a boon to C3.ai stock as it disclosed that AI activity is at the highest levels its ever seen and continues to accelerate, as evidenced by closing 43 deals in the quarter, including 19 pilots.

Bear Raid 

On April 4, 2023, C3.ai shares fell victim to a short seller letter from Kerrisdale Capital Management to the U.S. Securities and Exchange Commission (SEC). The letter claims C3.ai inflated its revenues and margins to inflate shares of its stock, failing to disclose material weakness with its internal controls. Kerrisdale questioned its accounting, specifically its use of unbilled revenues and 100% margins with its largest client Baker Hughes Co. NYSE: BHI. The allegations sent shares toppling over (50%) from a high of $34.68 to a low of $16.91 in the following three weeks.

Luring the Bear 

During a Bloomberg Podcast, C3.ai CEO Tom Seibel commented on unbilled revenues among software companies. It's the same as accrued revenue, where the work has been performed but has yet to be billed due to long-term contracts or billing cycles not matching the quarterly close. 

C3.ai didn't do much more to dispute or combat the claims other than stating it would cooperate with any SEC investigation. The company laid low without any further rebuttals as bears became complacent. Investors didn't seem convinced as shares continued to wallow under $20 into May.

Rope-a-Dope Attack 

On May 14, 2023, C3.ai moderately raised its fiscal Q4 revenue guidance to $72.1 million to $72.4 million from previous guidance of $70 million to $72 million versus $71.09 million consensus analyst estimates. Net cash from operations was $28.1 million to $29.5 million. 

Positive free cash flow was $18 million to $19.4 million. Non-GAAP operating loss from operations was $23.7 million to $23.9 million, which beat previous guidance too. GAAP losses from operations should reach between $75.9 million to $77.1 million.

Bear Trap

With a nearly 33% short interest, the announcement was akin to lighting a match in a kerosene-soaked warehouse. The disclosure rocketed shares higher for the next four days, rising 40% to hit highs of $28.15 before reversion set in. The high short interest was a factor in the price spike. 

C3.ai also added many details, like the successful reception of its new consumption-based pricing model. AI claims its platform is the gold standard of enterprise AI with over 40 production enterprise AI applications. This enables companies to onboard faster and cheaper without substantial upfront costs and its sales pipeline of qualified enterprises grew 100% in the past year.

Non-GAAP Profitability by 2024

The company targets non-GAAP profitability by the end of fiscal 2024, closing the current fiscal year 2023 out with $800 million in cash and cash equivalents. It should officially release its fiscal Q4 2023 earnings report after the bell on May 31, 2023. Investors wonder if AI may have taken the thunder out of its scheduled earnings report ushering in a sell-the-news reaction upon the actual release.

Look for C3.ai analyst ratings and price targets on MarketBeat.

Larger Weekly Cup and Handle

AI had previously formed a cup and handle breakout with a cup lip line at $28.48 and a handle forming off the $20.16. The previous cup and handle breakout surged to $34.68 before the short-seller Kerrisdale's letter to the SEC triggered panic selling on the bear raid. This sent the share down through the handle low of $20.16 to a new handle low of $16.79. The market structure low (MSL) buy trigger formed at $20.63.

The weekly stochastic formed a mini inverse pup drop, now stalling under the 40-band. The MSL triggered on the Q4 guidance announcement spiking shares to a high of $28.15 before a daily market structure high (MSH) formed at $25.06. The larger cup and handle can trigger the new cup lip line breakout at $34.49. Pullback supports are at $23.58, $20.63 weekly MSL trigger, $18.52 and $16.79 handle low.