Unraveling the Impact of Microsoft's Alliance on C3.ai Stock

Background and Initial Reaction

On Tuesday morning, C3.ai (AI 24.32%) stock took off, surging by 13.2% through 9:50 a.m. ET. This surge was triggered by the announcement of a "strategic alliance" between C3.ai and software powerhouse Microsoft. Each company's unique strengths were highlighted, with artificial intelligence (AI) applications specialist C3.ai and AI server farm operator Microsoft vowing to work together to enhance existing capabilities and introduce new innovations. This alliance aimed to assist their mutual customers in maximizing the delivery of high-value enterprise AI solutions with Azure.

Specifically, Microsoft intended to integrate C3.ai's enterprise AI application software into the Microsoft Commercial Cloud Portal, align C3's apps with new Azure capabilities, and collaborate on marketing and delivering C3's products to customers. Going forward, Microsoft would be the preferred cloud provider for C3 AI offerings, and vice versa, with C3.ai becoming a preferred AI application software provider on Microsoft Azure.

The Details and Considerations

It's important to note the details of this alliance. Given the size difference between C3.ai, with a market capitalization of $3.8 billion, and Microsoft, whose market cap exceeds $3 trillion, Microsoft is set to be the dominant preferred provider. While C3.ai will be a preferred provider for Microsoft, it holds a relatively smaller position. This disparity in market power raises questions about the long-term impact on C3.ai's stock.

Moreover, in the same press release announcing the new alliance, C3.ai also mentioned that it already had an existing strategic alliance with Microsoft for the past six years. Additionally, there were no actual numbers or predictions of new revenue or profits for C3.ai arising from this new alliance. Last but not least, despite the existing alliance, C3.ai lost $280 million last year and is expected to continue incurring losses in the foreseeable future, according to analyst estimates.

Risk and Investment Considerations

C3.ai remains a risky stock, and it is not a buy at present. The market's initial overreaction to the news may have led some investors to overlook the underlying risks. While the alliance holds potential for both companies, the current financial situation of C3.ai raises concerns. Investors need to carefully assess the risks and rewards before making any investment decisions.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool, on the other hand, has positions in and recommends Microsoft. It also recommends C3.ai and suggests certain options, such as long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy to ensure transparency in its investment recommendations.