Share prices of C3.ai (AI -6.05%) sank after the enterprise artificial intelligence (AI) software company reported its fiscal 2025 third-quarter results on Feb. 26, despite overall solid results.

After a strong run to end 2024, the stock has now given back all of its recent gains and is down more than 30% year to date and 20% over the past 12 months.

But could the stock be poised for a rebound?

Disappointing subscription growth and guidance

In its fiscal 2025 third quarter, which ended Jan. 31, C3.ai's revenue climbed 26% to $98.8 million. This broke the company's streak of revenue acceleration, but it was its fourth straight quarter of 20% or more growth and second quarter of growth in excess of 25%. Its revenue was within its $95.5 million to $100.5 million guidance range and was above the midpoint.

Data source: C3.ai earnings reports. YOY = Year over year.

Subscription revenue jumped by 22% to $85.7 million. Professional services revenue, meanwhile, soared by 64% to $13.1 million.

C3.ai said that excluding income from Baker Hughes -- its largest client -- its revenue surged 43%, which would have been an acceleration from its 41% growth on that metric in the previous quarter. It's still unclear whether their partnership will be extended after their current agreement ends in June. Baker Hughes accounts for about 18% of C3.ai's revenue.

The company's new extended partnership with Microsoft, meanwhile, has begun bearing fruit. Under the deal, which runs until March 2030, C3.ai's solutions are available through Azure, and Microsoft's salespeople get commissions for Azure C3 AI sales. Since the partnership, Microsoft salespeople helped close 28 agreements across nine different industries, which was a 450% increase quarter over quarter. In addition, it said its sales cycle with Microsoft had been shortened by 20% while its pipeline with the tech giant had skyrocketed.

C3.ai was also busy inking other new partnerships in the quarter. It expanded a strategic alliance with Amazon to offer advanced enterprise AI solutions on AWS, and announced a partnership with McKinsey QuantumBlack, the company's AI consulting arm.

In fiscal Q3, C3.ai said 71% of its agreements were delivered in collaboration with its partners. Overall, it signed 66 agreements in the quarter, of which 50 were pilots -- three- to six-month term contracts during which customers can try out its services. Twenty of these were generative AI pilots.

The company's gross margin came in at 59.1%, up from 57.8% in the prior year period. Its adjusted gross margin (which factors out stock-based compensation expenses) was around 69%. Subscription gross margin was 55.9% for the quarter, up from 54.2% a year ago. Overall, these are pretty low gross margins for a subscription software business.

C3.ai continued to be unprofitable, booking an adjusted loss of $0.12 per share. That was a slight improvement from the $0.13 per share loss it produced the prior year period.

It generated negative free cash flow of $22.4 million in the quarter and negative $54.48 million free cash flow through the first nine months of its fiscal year. It ended the quarter with $724.3 million in cash and marketable securities on its books, and no debt.

Management guided for fiscal Q4 revenue to be between $103.6 million and $113.6 million, which would equate to 20% to 31% growth. It also narrowed its fiscal 2025 revenue guidance range to $383.9 million to $393.9 million.

Source: C3.ai's earnings press releases.

Can the stock rebound?

C3.ai is enjoying some solid gains from its Microsoft partnership, and it just signed new deals with Amazon and McKinsey QuantumBlack. However, the question of whether or not Baker Hughes is going to renew its agreement remains a significant overhang.

Now Baker Hughes is no longer a growth driver for C3.ai, which could perhaps be better off selling its services directly to the oil and natural gas industry. Still, the loss of that partnership would likely be viewed by the market as a big negative for the software company.

Meanwhile, C3.ai distributes an exorbitant amount of stock-based compensation, which bolsters its adjusted metrics. The company had $215.8 million in stock-based compensation expenses through the first nine months of its fiscal year, which was equal to nearly 70% of its revenue. While that's a non-cash expense, it is a real expense and it dilutes shareholders.

From a valuation perspective, C3.ai trades at a forward price-to-sales (P/S) ratio of about 6 based on analysts' consensus estimates for fiscal 2026. That's not an expensive valuation for a software-as-a-service (SaaS) company, although its weak gross margins and aggressive use of stock-based compensation also need to be taken into consideration.

Data by YCharts.

With the uncertainty about the Baker Hughes partnership still hanging over C3.ai's head, I would stay on the sidelines when it comes to the stock.