What happened

Shares of C3.ai (AI 4.56%) were down 12% as of 10:39 a.m. ET on Thursday after the company's earnings report for the fiscal quarter ending July.  

Revenue of $72.4 million was slightly better than the $71.6 million analysts expected. The company's adjusted loss per share of $0.09 was narrower than in the year-ago quarter and better than the consensus estimate calling for a loss of $0.17.

What seemed to spook the market was slowing revenue growth and management's decision to invest more in its generative artificial intelligence (AI) opportunity, which will pressure profitability for fiscal 2024.

So what

The stock is up 147% this year, as investors have high expectations for C3's AI application software. However, the company is failing to live up to investors' high growth expectations. In the year-ago quarter, C3 reported a revenue increase of 25% year over year (YOY), but in the latest quarter, growth slowed to under 11%.

But there are good reasons to expect revenue to accelerate again. Management is seeing strong fundamental trends driving interest in its AI solutions. "We are experiencing strong traction with our enterprise AI applications and especially C3 Generative AI," CEO Thomas Siebel said.

C3 has an expanding base of partners, where it recently closed 60% of its agreements including leading tech companies. Major corporations are using C3's generative AI solutions, and the company reported an expanding relationship with the U.S. Department of Defense, as government-related bookings grew 39% YOY.

Now what 

Another issue for investors is the stock's valuation. The stock's price-to-sales ratio of 11.4 is high for an unprofitable business showing weak growth. The stock will likely remain under pressure until growth accelerates. For what it's worth, analysts currently expect revenue to grow 15% in fiscal 2024 and 20% in fiscal 2025.