C3.ai (NYSE:AI) has burned a lot of investors since its initial public offering (IPO) last December. The artificial intelligence software company went public at $42 per share, started trading at $100, and hit an all-time high of $183.90 right before Christmas.

However, C3.ai's stock price subsequently dropped back to the high $40s as its revenue growth stalled out. But should investors consider buying this former Wall Street darling ahead of its next earnings report on Dec. 1?

A white android with a shattered skull against a black background.

Image source: Getty Images.

What happened to C3.ai?

C3.ai develops AI algorithms, which can either be plugged into a company's existing software applications or accessed as pre-built cloud services. These algorithms can help large companies streamline their supply chains, improve their safety, cut costs, detect fraud, and make other data-driven decisions.

C3.ai initially gained a lot of attention for two reasons. First, it was founded by Thomas Siebel, who previously co-founded Siebel Systems and oversaw its $5.85 billion sale to Oracle in 2006.

Second, C3.ai was growing like a weed. Its revenue surged 88% in 2018, 48% in 2019, and 71% to $157 million in fiscal 2020, which ended last April.

Why did C3.ai lose its luster?

C3.ai initially dazzled investors with its explosive growth rates, but it generated most of its revenue from large industrial and energy companies. Pandemic-related disruptions to those sectors throttled its growth in fiscal 2021, and its revenue rose just 17% to $183 million.

C3.ai's number of customers increased 82% to 89 in 2021, but its average contract value dropped from $12.1 million to $7.2 million. The company claims that reduction is intentional, since it wants to reduce its dependence on large "elephant" clients, but that decline is throttling its top-line growth.

Its gross margin rose by a percentage point to 76% in fiscal 2021, but its net loss only narrowed slightly, from $69 million to $56 million. Its slowing growth, red ink, and frothy valuation -- which surpassed 80 times its fiscal 2020 revenue last December -- caused the stock to lose some luster.

But is C3.ai's business stabilizing?

In the first quarter of fiscal 2022, C3.ai's revenue rose 29% year over year to $52 million. Its number of customers rose 85% to 98, but its average contract value declined again to just $4.5 million.

Its gross margin increased from 74% to 75%, but it remained unprofitable with a net loss of $37 million -- compared to a slim profit a year earlier.

For the full year, C3.ai expects its revenue to increase 33%-35% as the pandemic-related headwinds fade. It also expects new partnerships -- including a co-selling agreement with Alphabet's Google Cloud and an AI development partnership with Snowflake -- to boost its sales.

However, C3.ai still expects its adjusted operating loss to roughly triple to $107-$119 million this year as it ramps up its investments again.

Is C3.ai's stock still overvalued?

C3.ai's stock still isn't cheap at 20 times this year's sales, but that price-to-sales ratio looks a lot healthier than its nosebleed valuations last December. It could also be justified if C3.ai exceeds analysts' expectations for 34% sales growth in both fiscal 2022 and 2023.

By comparison, Palantir (NYSE:PLTR), which collects and analyzes data for government agencies and large companies, still trades at 30 times this year's sales. It expects its revenue to rise 40% this year.

Datadog (NASDAQ:DDOG), which helps IT professionals oversee a company's infrastructure on unified dashboards, expects its revenue to rise 65% this year. Its stock trades at about 60 times that estimate.

Therefore, C3.ai's stock isn't terribly overvalued anymore -- but there's still a lot of optimism baked into its valuations.

Should you buy C3.ai before its second-quarter earnings?

C3.ai might surprise investors with a big earnings beat in December, but any sign of weakness could spark an ugly sell-off in this wobbly market.

I'd wait for C3.ai to post its earnings report in early December and see if its gross margins are still expanding, if its contract values are stabilizing, and if it maintains or boosts its full-year guidance before buying the stock. Until then, I'd prefer to stick with other high-growth stocks to profit from the booming AI market.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.