The shares of C3.ai (AI) are tumbling 12% today after KeyBanc downgraded its rating on the stock to Underweight from Sector Weight. C3.ai provides platforms that enable companies and government agencies to more easily integrate, develop and utilize AI.

KeyBanc analyst Eric Heath downgraded AI stock primarily based on valuation, as he noted that the firm's shares were changing hands for 13.3 times sales before today's action, after adjusting for the cash that it holds. That is indeed a very high price to pay for a stock. And even after today's pullback, C3.ai still has a forward enterprise value-to-sales ratio of 11.3 times.

Additionally, Keybanc's Heath believes that the firm may have difficulty meeting analysts' average estimates for fiscal 2026 and fiscal 2027. The analyst issued that warning because the company's "subscription revenue growth excluding upfront license" fees fell to -1% year-over-year during its last reported quarter.

KeyBanc became the second bank to lower its rating on AI stock to Underweight this month. That's because JPMorgan cut its rating on the name to Underweight from Neutral on Dec. 11.

JPMorgan noted that the company's incremental margins had only risen by 2% in the previous year. Moreover, the bank believes that the company's guidance for its full fiscal year implies that it will deliver an incremental margin of -30%.

The bank also noted that, although C3.ai had made a new deal with Microsoft (MSFT), that arrangement could be offset by the expiration of its deal with Baker Hughes (BKR) in April 2025.

While we acknowledge the potential of C3.ai, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than C3.ai but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey