Investors are clamoring to put money into the hottest artificial intelligence (AI) stocks. This has pushed valuations to levels that are hard to justify, even given the incredible opportunities AI will enable.

While it may seem tempting to invest in C3.ai (AI 3.02%) and Nvidia (NVDA 6.18%), both AI stocks are risky propositions.

C3.ai

In the midst of an AI frenzy, C3.ai is only expecting to grow revenue by about 15% in fiscal 2024, which kicked off on May 1, 2023. It's hard to reconcile this anemic growth with the stock's soaring valuation.

C3.ai does two things: It offers an AI development platform and sells a suite of enterprise AI applications. Customers have shifted hard toward those applications and away from the developer platform, with 83% of bookings coming from applications in fiscal 2023.

C3.ai offers a pilot program for its applications, which includes unlimited usage along with help deploying, designing, configuring, validating, and training AI models. The end result, after a four- to six-month period, is a live AI-powered application that can be scaled across an organization.

C3.ai closed 19 pilots in the final quarter of fiscal 2023, but at this point, it's hard to know how successful the company will be in converting those pilots into long-term contracts. The average sales cycle is nearly four months long. Add another four months for the pilot to run its course, and that's at least eight months for a prospect to become a long-term customer.

ChatGPT, the AI-powered chatbot from OpenAI that kicked off the AI boom, had barely launched eight months ago. The AI industry is moving fast, and C3.ai is competing with established software companies that are layering AI features on top of products with massive customer bases. It's going to be an uphill battle.

The company expects to generate as much as $320 million of revenue in fiscal 2024, along with an adjusted operating loss between $50 million and $75 million. With a market capitalization approaching $5 billion, that's a price-to-sales ratio of roughly 15 for an entirely unproven software company that's burning cash and growing slowly.

That doesn't sound like a compelling investment opportunity to me.

Nvidia

In contrast to C3.ai, Nvidia's business is absolutely booming. The company's data center graphics cards are used to train the most advanced AI models.

Thousands are linked together to churn through incredible amounts of data. The company's latest H100 GPU, by far the fastest AI accelerator available, sells for tens of thousands of dollars each.

Nvidia expects to generate $11 billion of revenue in the second quarter of fiscal 2024, which started on May 1, 2023, up from $7.19 billion in the first quarter. This rapid growth will primarily be the result of soaring demand for Nvidia's data center products.

What makes Nvidia stock risky is not the financial performance of the company, but the expectations that are embedded in the stock price. The company is now valued at over $1 trillion, or 27 times the average analyst estimate for fiscal 2024 revenue. This sky-high valuation assumes that the AI boom will persist for many years and that no meaningful competition will threaten the company's dominant status.

AI as a technology is certainly here to stay, but the gold rush period we're in isn't going to last forever. And competition is already here.

Intel, through its acquisition of Habana Labs, already sells capable AI accelerators aimed at training advanced AI models. Meanwhile, AMD is set to launch its own ultra-powerful AI GPU later this year. Nvidia has the advantage of an established software ecosystem around its chips, but that advantage can be chipped away over time.

Nvidia's valuation makes the stock extremely risky. Its stock could still turn out to be a great long-term investment, but it's far from a sure thing.