This stock was "under the radar" for a long while and isn't exactly unknown. Loyal readers will recall that I once referred to C3.ai Inc (AI) as my lottery ticket. Well, funny thing about those of us who consider ourselves to be both traders and investors. Our inner-trader can often talk our inner-investor into taking what seem like huge gains in percentage terms long before that inner-investor ever thought that he or she might lose patience.
AI, the stock, and not the technology that the next industrial revolution is being coordinated around, was up 30% last week and after closing on Friday near its 2023 highs, was up another 15% in early trading Tuesday morning. Is there a catch-up trade? Is this one better left not getting caught up on? We do know that the firm is set to report its fiscal fourth quarter financial results after the closing bell on Wednesday (tomorrow) afternoon, so there likely could be some opportunity.
Coming in Hot
Last week, primarily in response to Nvidia (NVDA) earnings and guidance and then backed up by the Action Alerts PLUS holding Marvell Technology (MRVL) release, all things artificial technology ran wild. While the majority of stocks across the universe of equities struggled to avoid losses, tech ran hot as the semis (primarily the GPU designers), the software names (primarily cybersecurity) and the data-center cloud providers (the big kids... Microsoft (MSFT) , Amazon (AMZN) , Alphabet (GOOGL) led the way.
Who is C3.ai (AI)?
The Redwood City, California firm considers itself an enterprise artificial intelligence software company that provides Software as a Service (SaaS) solutions to customers through the deployment of two software platforms.
First, there is the C3 AI Suite, which is an end to end platform as a service that allows clients to design, develop, provide, and operate AI applications for themselves.
The second, C3 AI Applications is a portfolio of turnkey non-industry specific and industry specific enterprise applications. This platform has been built using the C3 AI Suite platform, but is already ready to be installed and deployed. The platform already has turnkey applications ready to serve the oil and gas industry as well as the chemicals, utilities, manufacturing, financial services, defense, intelligence, aerospace, healthcare and telecom industries.
Expectations
For the fiscal fourth quarter, whose results are set to be reported in about 30 hours depending on when you read this, Wall Street is looking for an adjusted EPS loss of $0.17 (with a GAAP EPS of more like $-0.66) on revenue of roughly $71.3M. This would compare to year ago adjusted EPS loss of $0.23 on revenue of $72.3M.
These expectations, unless they are off by quite a lot, appear to reflect a business that is stagnating. Expected revenue for this quarter is actually lower than the year ago actual sales result. In fact, year over year sales growth has already been decelerating for a full year and if the quarter does show a year over year outright contraction in sales, it would be the second consecutive such print.
That said, the firm let us know two weeks ago that the April quarter will turn in a better performance than analysts had projected. The firm announced that it had generated revenue of $72.1M and $72.4M for the period, which is still really flat versus the year ago comp. The firm also sees operating cash flow of $28.1M to $29.5M and free cash flow of $18M to $19.4M. The firm still sees an adjusted loss from operations of $23.7M to $23.9M, which is better than the firm even expected, but still not optimal.
While the preannouncement is certainly positive, the real enthusiasm recently seen in this name, I think, comes from two directions. First, C.3a Inc announced last week that it had concluded its investigation into recent short-seller claims and had found nothing inappropriate. Secondly, the firm's generative AI platforms are now available as a public offer on Alphabet's Google Cloud Marketplace.
What I See...
What you see here, since early this year, is a broadening symmetrical triangle. This is a somewhat rare technical pattern reflective of rising volatility often due to investor disagreement in the valuation or potential for growth in an underlying security. These patterns often follow a sharp move, which was true for this stock. AI, the stock, was up more than 200% late January into early February.
No promises, but these patterns, in my history tend to more likely than not, resolve in bearish fashion. This means to me that the gap created this morning will likely fill. I don't know when, but it does make sense that the $34 resistance level, which just cracked, will at some point be tested as support a minimum of one time.
For that reason, if I were interested in reestablishing my long position in this name, I would probably place a mental $34 top limit on my also mental GTC (Good-Til-Cancelled) order. Those thinking similarly, could sell (write) $34 puts expiring this Friday this morning for about $3.60. Even if forced to eat the shares, that would leave the trader with a net basis of $30.40. I think that if the stock sells off it will overshoot that level. I also don't want to miss out if the stock goes on some kind of epic tear.
A trader thinking in that way could pay almost $4 for $40 calls expiring this Friday, and simultaneously sell $35 puts expiring on Friday for about that same price. That way, the trader might buy the shares at $40 later this week, or may have to pay $35 at that point with no risk at all between those two price-points.
Then, there are the chicken-hearted traders, in which there is no shame. Those traders could get paid about $1 to open themselves up to equity risk expiring this Friday at the $28 level ($27 net debit).
(MRVL, MSFT, AMZN and GOOGL are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
