C3.ai (AI 0.84%) was one of the most popular AI investments when the AI investment wave started in early 2023. While it saw a drawdown later that year, it reached another subsequent peak in December 2024, when the stock nearly hit $43 per share. The stock has since crashed and is now down around 50% from its all-time highs.

That's a big tumble in a short amount of time, but is it enough to warrant taking a position in this AI player?

C3.ai is growing its customer base

C3.ai is focused on providing pre-built AI applications that clients can plug and play in various scenarios. Its reach is quite broad, as its Q3 FY 2025 booking (ending Jan. 31) was 24% in professional services, 24% in federal and defense clients, 15% in energy, 8% in healthcare, and 9% in high technology, among many other sectors.

So, there's clearly a wide use case for C3.ai's products, and its client list is growing ever larger. A key area where C3.ai is making great progress is in its partnerships with some of the major cloud computing players. C3.ai has a close relationship with Amazon (NASDAQ: AMZN) Web Services (AWS) and Microsoft (NASDAQ: MSFT) Azure to provide these turnkey AI solutions on their networks.

C3.ai also conducted 20 generative AI pilots in Q3 with several large clients. While these are pilot programs, and there are no guarantees they will be awarded future business, it's a great sign that C3.ai is making inroads with potential clients.

All of this added up to what could be considered a successful Q3 for C3.ai, as revenue grew 26% year over year to $98.8 million, which is slightly above where management projected it would be. However, investors didn't focus on C3.ai's growth. Instead, they focused on a massive problem for C3.ai: profits.

Unprofitability is a major problem for the stock

With C3.ai being a growing software company focused on the next cutting-edge technology, investors are willing to overlook its unprofitability as it tries to capture as much market opportunity as possible. However, there are limits to the investing community's graces, and C3.ai has often tested those limits.

C3.ai is incredibly far from becoming profitable, and it hasn't made much effort to improve its losses either.

AI Operating Margin (Quarterly) data by YCharts

Although this chart may look like C3.ai is trending in the right direction, it still posts an operating loss nearly equal to its revenue, which means it's spending almost twice as much as it brings in. However, this isn't a true picture of its profitability, as GAAP accounting rules require companies to include stock-based compensation in these figures.

In Q3, C3.ai's GAAP operating loss was $87.6 million. When stock-based compensation is removed from the equation, this figure rises to $23.1 million. While that isn't a free pass for C3.ai, it shows that the company isn't at risk of going out of business with nearly $600 million of cash and equivalents on its balance sheet.

However, the problem with C3.ai's excessive stock-based compensation is that it dilutes shareholders. There are 19% more shares than at the start of 2023, which means each share is now worth less (think of this effect as similar to inflation).

This is the primary factor that keeps me from owning C3.ai shares. The base business is solid, but because of excessive stock-based compensation and huge losses, I think investors should find a different AI stock to invest in.