Shares of C3.ai (AI 3.02%) closed up 11.7% on Thursday, rebounding from last week's post-earnings drop. There was no company-specific news that might have otherwise spurred the artificial intelligence (AI) software specialist's rally today.
Rather, even as broader stock market indexes remain roughly flat -- with the S&P 500 and Nasdaq Composite indexes each up around 0.2% today -- opportunistic investors appear to be scooping up beaten-down growth stocks like C3.ai after U.S. Federal Reserve officials signaled multiple interest-rate reductions are on the way in 2024.
On the impact of falling rates for companies like C3.ai
Yesterday afternoon, the broader market rallied after the central bank's officials opted to leave their benchmark interest rate flat at a targeted range of between 5.25% and 5.5%. It was the third straight meeting during which rates were left unchanged.
More exciting for investors in growth stocks, however, was the simultaneous news that policymakers on the Federal Open Market Committee signaled there will be at least three rate cuts in 2024, most likely in increments of .25 percentage points. This will mark the first interest-rate reductions since the Fed began raising rates in March 2022 to combat high inflation.
Why is this good for C3.ai? For one, high interest rates tend to make investors in equities more risk-averse as returns on fixed-income securities become more attractive. Higher rates also tend to make it more difficult for yet-to-be-profitable tech stocks like C3.ai to raise capital -- whether through interest-bearing financing facilities or new share issuances. Though C3.ai has nearly tripled so far in 2023 as excitement over (AI) stocks seemingly reached a fever pitch, the stock is also down more than 80% from its post-IPO highs in late 2020.
What's next for C3.ai investors?
C3.ai has been striving to maximize profitability, regardless of whether rates come down. Just last month, the company implemented its latest round of performance-based job cuts, with management citing the need to reduce costs as it scales. And during last week's quarterly earnings conference call with analysts, C3.ai CFO Juho Parkkinen confirmed the company is on track to deliver positive cash flow starting in the fourth quarter of fiscal year 2024 (ending April 30, 2024), followed by its first adjusted (non-GAAP) net profit in the second half of fiscal year 2025.
Perhaps C3.ai wouldn't need to worry much, then, about the impact of sustained high interest rates, even if the Fed opted not to reduce them next year. But given the company's relative fall from grace since its IPO, it's no surprise to see growth-hungry investors buying C3.ai stock today.
