C3.ai (AI -4.26%) continued its wild ride in February by surging 50% higher, according to data provided by S&P Global Market Intelligence. The artificial intelligence (AI)-as-a-service pioneer reported quarterly earnings that included encouraging news on burn rate and important customer metrics. C3.ai was able to claw back some of the past two years' shareholder losses with impressive results at a time when investor risk appetite is rising -- especially for AI stocks.
C3.ai nailed key data points
C3.ai's Feb. 28 earnings report modestly outperformed Wall Street's sales estimates, but its net losses were much smaller than anticipated. Its cash burn has been under increased scrutiny since the Federal Reserve hiked interest rates. Wall Street is favoring self-sufficient businesses right now, and analysts certainly took note of C3.ai's lower-than-expected burn.
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C3.ai also increased its sales guidance, prompting analysts to revise their forecasts higher as well. The company's 18% growth was basically unchanged from the prior quarter, but the underlying metrics were promising. Subscription revenue accelerated more sharply than service revenue. Service revenue tends to be less predictable and lower margin than software subscriptions.
C3.ai also reported significant improvements in the number of new customer engagements, which is essential for this story. The company has significant revenue concentration in its largest customer and the energy sector, which creates risk for investors. Disruptions to the energy or industrial sectors could disproportionately impact C3.ai in ways the company can't control.
The latest booking data shows better traction among customers from the government, professional service, defense, manufacturing, and agriculture industries. That's evidence of improving broad-based demand, which is great news for C3.ai. It's also noteworthy that these developments were attained by utilizing partnerships with potential competitors, such as Microsoft and Google. These are positive steps toward mitigating some of the key risks that have been hanging over the stock for the past few years.
It's an expensive stock with major momentum and a lot of potential
C3.ai is moving toward re-establishing itself as a key player in one of the biggest growth industries over the next decade. It could be one of the most effective services for bringing the power of AI to businesses that aren't necessarily tech-focused.
That seems inherently valuable, and investors have shown their willingness to pile into the stock when the company executes well. As we saw throughout February prior to its earnings release, C3.ai stock can rise on news from other companies, with the likes of Nvidia providing bullish data on the demand for enterprise AI software.
That said, C3.ai investors need to balance the risk and upside potential for this stock. The company is still burning cash -- roughly $40 million last quarter. It might be a while before it can support itself with cash flow from operations.
Longer term, it could face significant competition from larger tech companies already making waves in the AI world. Customer concentration is still a risk in the short term. The stock's price-to-sales ratio is just under 13, which is high enough to foster volatility if key metrics or its growth outlook disappoint investors.
