Shares of C3.ai (AI 6.78%) have surged this year, swept higher by a wave of hype surrounding artificial intelligence technology. The rally is certainly not due to the company's results. Revenue is flatlining as C3.ai shifts from a subscription-based model to a consumption-based model, and losses are enormous. The company sells its AI application-development platform and its suite of AI applications to large enterprises, which means long sales cycles and hefty spending on sales and marketing.

The stock crashed on Thursday following a rough earnings report for the fiscal fourth quarter, which ended April 30. Revenue was unchanged from the prior-year period, net loss worsened, and the company guided for a sequential revenue decline in the first quarter of fiscal 2024.

What AI boom?

"The interest in applying AI to business processes is more active than we've ever seen," reads C3.ai's earnings report. Despite this increased interest, the company expects sluggish revenue growth in fiscal 2024. C3.ai guided for full-year revenue of $295 million to $320 million, which represents growth of about 15% at the midpoint. Given the explosion in interest in AI and the fact that C3.ai's fiscal year is barely underway, that growth rate is underwhelming.

One thing changing about C3.ai's business is a shift in interest away from its AI development platform and toward its suite of AI applications. The company sells a wide range of enterprise software products that tackle customer relationship management, inventory optimization, demand forecasting, cash management, commercial property appraisal, and various other functions.

What advantage does C3.ai have in application software? Using AI as a selling point is fine, but almost every software company is finding ways to integrate AI into their own products. Customer relationship management (CRM) leader Salesforce, for example, unveiled a generative AI feature called Einstein GPT in March, allowing customers to generate personalized emails, create targeted content, and write code.

C3.ai's products are certainly not selling themselves, although the company is seeing sales cycles shorten and increased interest thanks to its six-month pilot program. The average sales cycle was 3.7 months in Q4, down from 5 months in the prior-year period, and the pipeline of potential deals has strengthened over the past year. But all of this comes at a cost.

C3.ai spent $51.7 million on sales and marketing in Q4, which consumed all its gross profit and more than 70% of its total revenue. Spending on research and development was nearly as high, and once all the costs are tallied, operating loss was $73.3 million on $72.4 million of revenue. Free cash flow was positive in Q4 but only because the company relies heavily on stock-based compensation.

A muddled growth story

The best stocks often have simple stories. For NVIDIA, another stock that's been surging thanks to the AI boom, the story is about as simple as it gets: NVIDIA designs powerful chips that are used to train and run advanced AI models.

In contrast, C3.ai sells dozens of enterprise-software applications that cover a lot of ground. It competes with established software vendors that are increasingly sprinkling AI capabilities into their own products. Interest in its products is rising but only enough to drive 15% revenue growth this year. For a company as small as C3.ai operating in the hottest part of the tech industry, it's hard to see that guidance as anything but a massive disappointment.

Valued at $4.5 billion before Thursday's plunge, C3.ai stock has a premium valuation that it doesn't appear to deserve. Things may work out for the company in the long run, but C3.ai just doesn't look like a compelling investment right now.