At the beginning of 2023, few people would have accurately predicted how C3.ai (AI 0.20%) stock was going to perform this year. After booking a year-to-date rise of more than 300% at one point, it trended in the other direction. Since early August, it has dropped by about 40%.

After a summer when the stock looked overvalued, the AI stock has dipped to a more reasonable level. Considering the world's continued focus on AI, has that decline made C3.ai a buy, or should investors still avoid this stock?

The state of C3.ai

A growing recognition of the power and potential of artificial intelligence stoked broad investor interest in AI stocks across the board, and at one point, C3.ai stock was generously rewarding shareholders. For much of the year, it was outperforming the stock many consider the leading light of the AI industry -- Nvidia.

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C3.ai specializes in AI-powered enterprise software for clients in a variety of industries. Its top customer is the U.S. Department of Defense, which accounted for 67% of total bookings in the company's fiscal 2024 first quarter (which ended July 31). Shell and Bank of America are some of its other prominent clients.

Indeed, C3.ai emphasizes generative AI, the type of natural language processing software that supports OpenAI's ChatGPT and other applications.

Financial struggles

Nonetheless, one might wonder whether the "AI" in the company's name was the biggest factor in its recent stock rally. Investors seem increasingly aware that its revenue growth has lagged that of its peers despite its role in the AI industry. For fiscal Q1, its revenues increased by a comparatively modest 11% year over year to $72.4 million.

That was an improvement from its fiscal 2023 (which ended April 30), when its revenue grew by only 6%. Still, it significantly lagged the 38% growth rate of fiscal 2022.

Also, the company lost $64 million in its fiscal Q1. That was a slight improvement from its $72 million loss in the prior-year quarter, but that result was arguably not enough to sustain the stock's gains from the first half of the calendar year.

The company's guidance points to higher revenue increases. C3.ai estimates between $295 million and $320 million in fiscal 2024 revenue. That would be a 15% gain at the midpoint.

However, the company also forecasts a non-GAAP loss from operations of between $70 million and $100 million. That indicates that GAAP profitability is not likely for the foreseeable future.

Since C3.ai still claims around $750 million in liquidity, it can sustain its current pace of losses for years. Still, such a performance could make it more challenging to attract investors.

Also, it sells at a price-to-sales ratio of 11, well below its peak ratio of 85 in December 2020. Nonetheless, C3.ai began 2023 with a price-to-sales ratio of 4, and with no end in sight to the losses, investors may think twice about paying the current sales multiple, even after the pullback.

What to do about C3.ai stock

Even in the wake of its considerable retrenchment, investors should probably stay on the sidelines. Yes, the company's AI-driven software and client base would indicate significant growth potential, and the price of the stock has fallen significantly from its 52-week peak. However, the market was likely overvaluing the AI stock when the share price was growing faster than Nvidia's.

Moreover, even with its slight improvements in revenue growth, C3.ai has not come close to matching its growth rates of fiscal 2022. Given the revenue growth in the low double-digit percentages and losses that will likely persist into the foreseeable future, C3.ai's business does not appear to justify its current sales multiple.