C3.ai (NYSE:AI), a pure-play enterprise AI software provider, has been one of the high flyers of the market in 2023. Since the start of the year, AI stock has gone from strength to strength. As of the time of writing, shares are up more than 90% since the start of the year.

However, recent developments, including a change in the company’s business model and allegations of accounting fraud, have jeopardized its rally.

This article will explore whether C3.ai is a buy now, considering the company’s financial performance, the accusations against it, and long-term growth prospects.

Short-Term Headwinds

C3.ai recently reported revenue of $66.7 million for its fiscal 2023 third quarter, a dip of 4.45% from the prior-year period.

The company expects full-year revenue of $265 million at the midpoint of its guidance range, translating into a modest 5% jump over fiscal 2022’s revenue of $252.7 million.

C3.ai is not setting the industry on fire with its performance. As a result, some analysts believe that C3.ai is overvalued.

To understand why, look at the company’s price-to-sales ratio. During the past four years, C3.ai’s highest PS ratio was 70.91. The lowest was 4.31. The median PS ratio was 10.80. Currently, its PS ratio is 8.51.

You might think that is cause for celebration. However, consider the context. Historically, tech stocks like AI usually trade at a premium. That was the case during the bull market of 2020. Since then, valuations have fallen substantially, although great tech plays are still out there. Therefore, for a better comparison, investors need to analyze their peers.

Compared to other companies in the software industry, C3.ai’s PS ratio is far worse. This suggests that C3.ai’s stock price does not align with its financials and market conditions.

For instance, C3.ai’s PS ratio is much higher than the industry median, 2.39, and other companies like Progress Software Corp (NASDAQ:PRGS), Jamf Holding Corp (NASDAQ:JAMF), and Alarm.com Holdings (NASDAQ:ALRM). Their PS ratios are 3.87, 4.79, and 3.22, respectively.

Overall, while C3.ai has great potential in the long term, its high PS ratio and slower growth rates suggest that its overvalued at the moment.

Accusations of Accounting Fraud

Short-seller Kerrisdale Capital recently accused C3.ai of accounting fraud, causing the stock to decline significantly.

According to the report, C3.ai inflated its revenue and margin to appear as a software-as-a-service company. However, according to the report, it is a consulting services provider. Kerrisdale also pointed out that the company’s accounts receivables grew faster than revenue, implying that C3.ai is inventing revenue to meet Wall Street’s expectations.

While C3.ai has not yet publicly denied the accusations made by Kerrisdale Capital, it provided a statement to Bloomberg. In that statement, it asserted that the allegations were unfounded.

According to C3.ai, Kerrisdale’s claim that C3.ai’s financial disclosures related to Baker Hughes (NASDAQ:BKR) were inaccurate and demonstrates a lack of understanding of accepted accounting principles (GAAP). Furthermore, C3.ai accused Kerrisdale of deliberately attempting to manipulate the company’s stock price.

Kerrisdale Capital went public with a letter addressed to C3.ai’s auditor, Deloitte & Touche. The letter accused C3.ai of booking fake revenue and recording it as unbilled receivables.

Kerrisdale said C3.ai is incorrectly classifying consulting-based revenue as subscription revenue and trying to present itself as a subscription software business to get a higher valuation from the market.

It remains to be seen whether these allegations are credible. Investors are eagerly looking forward to an official response from C3.ai management.

The Pivot to Consumption-Based Pricing

Despite the fact that this switch may bring about some short-term inconveniences, C3.ai believes that the consumption-based pricing model is the right approach as it will not limit its customers to long-term agreements.

As AI software spending intensifies and C3.ai’s transition to the consumption-based pricing model progresses, the company’s revenue growth is expected to accelerate from fiscal 2024 onward.

Adopting the consumption-based pricing model will also boost C3.ai’s margins and profitability. For example, the company anticipates a fiscal 2023 non-GAAP loss of $69 million to $73 million. That compares favorably to the $81 million loss projected at the start of the year.

Investors must remain cautious and closely monitor the situation despite the promising outlook.

Is AI Stock a Good Investment?

C3.ai’s stock has surged due to the high demand for AI applications. However, the recent allegations of accounting fraud and business model change have jeopardized the rally.

Despite the short-term challenges, the transition to a consumption-based business model will accelerate revenue growth from fiscal 2024 onwards and improve profitability, given the massive potential of the enterprise AI market.

When the stock’s price dips, taking advantage of such an opportunity to invest in more shares may be worthwhile. This could potentially add value to your portfolio over time. In the meantime, there are other attractive options on offer.

On the publication date, Faizan Farooque did not hold (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.