What happened

The artificial intelligence (AI) hype cycle may have finally crested. Shares of C3.ai (AI 1.18%) have fallen by as much as 12.1% this week, according to data provided by S&P Global Market Intelligence. On Wednesday, the enterprise AI provider reported weak growth and huge losses in its fiscal 2024 first quarter, prompting investors to sell the stock. Shares are off 40% from their peak, but are still up 150% year to date.

So what

For the quarter, which ended July 31, C3.ai reported revenue of $72.3 million, up from $65.3 million a year prior. Some investors may take that as a good sign for the company's financial prospects. However, if you look further down the income statement, things look dire.

Gross profit for the fiscal quarter was $40.5 million, down from $46.9 million in the prior-year period. To achieve that decrease in gross profit generation, C3.ai spent $43.9 million on sales and marketing expenses -- a hefty outlay to see the business move backward. It's not a great sign for the continued adoption of the company's AI enterprise application solutions.

Combine its other operating expenses and C3.ai posted an operating loss of $74 million in the quarter, which gave it a negative operating margin of more than 100%.

This was one of the worst income statements I have ever come across. But even if the company was generating hefty profits on its revenue base, the stock would look overvalued. C3.ai trades at a price-to-sales ratio of 11.5, which is much higher than the S&P 500's average ratio of 2.5. The average S&P 500 component also doesn't have an operating margin of negative 100%.

Now what

It is clear that C3.ai has a broken business model. So why is the stock up by 150% so far this year? It all comes down to the hype around new AI tools. Smart investors know to not get caught up in a stock just because it is moving higher on a new Wall Street theme. They focus on the underlying business and how much profit the company will generate in the future. C3.ai is not generating any profits, and is in fact losing a ton of money.

Stay far away from C3.ai stock. It looks like shareholders are in for more pain in the coming quarters.