In the world of artificial intelligenceC3.ai (NYSE:AI) stock is a name many investors look to first. That’s not only because the company’s ticker symbol is AI (it helps).

It’s because this business’ focus is on allowing developers to design, develop and deploy enterprise AI applications.

Thus, in order for the AI revolution to take hold at a massive scale, companies like C3.ai will need to thrive to support the impressive growth on the horizon.

In many respects, the company has seen this demand flow through. The company’s Q1 revenue came in at $72.4 million, which was higher on a year-over-year basis, but fell short of last year’s 25% growth rate.

The company’s stock price has been on a downward trajectory in recent months, being cut roughly in half from this summer’s peak.

On a year-to-date basis, AI stock is still up more than 125% at the time of writing. However, many investors may believe this company’s $2.9 billion market capitalization is too rich.

Here’s the bear thesis which has driven much of the recent downside momentum we’ve seen in the stock of late.

AI Stock is Still Lacking

C3.ai, a SaaS firm, earns revenue through subscriptions and professional services. In Q1, it reported $72.4 million in revenue, with subscriptions growing at 8% year-over-year.

Around 67% of Q1 bookings for C3.ai came from the Federal Defense and Aerospace sectors, reminiscent of Palantir’s past focus on government contracts. Palantir has been diversifying into the private sector in recent years.

Just 17% of C3.ai’s recent bookings were from its AI platform, with the primary customer being the oil and gas sector.

Despite its stock rising over 130% this year, a new short squeeze is unlikely because of sluggish revenue growth and significant operating losses.

While recent investors may be impressed by its year-to-date performance, C3.ai lags behind other AI companies with stronger revenue growth.

The AI Sector is Competitive

AI solutions should be tailored to the specific needs of clients. Alphabet (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) offer diverse tools for different purposes, reflecting the multi-faceted nature of AI adoption in various industries.

Smaller firms like Palantir (NYSE:PLTR) are capitalizing on the potential of generative AI, boosting their stock value. Nvidia (NASDAQ:NVDA), with its data center products and semiconductor chips, holds a central role in the AI landscape.

Many AI companies thrive financially, but C3.ai remains unprofitable and lacks positive free cash flow.

What Now

C3.ai has long-term potential despite recent losses and aims for non-GAAP profitability this fiscal year. It holds a strong balance sheet with $790 million in cash. However, its valuation at over 11 times sales may deter some growth investors.

I believe a gradual approach, like dollar-cost averaging, may be a prudent approach for bulls looking to build a position in this name.

That said, there are some key question marks with this stock that bears have been right to point out with in recent months. If the valuation contraction we’ve seen among AI-related names continues, AI stock could have more downside in the near-term. 

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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