C3.ai (AI 5.38%) has grown its business by bringing artificial intelligence (AI) capabilities to multiple organizations. The company developed more than 40 industry-specific solutions to help entities address their AI needs.

Despite offering such benefits, the stock has fallen by 58% since peaking in December, and the considerable discount on this stock has not persuaded me to buy. Given the company's challenges, I see C3.ai as an AI stock investors should continue to avoid, and here's why.

The state of C3.ai

Admittedly, the case for C3.ai could look bullish on the surface. Through the company's enterprise software, entities can develop and implement AI applications quickly. Also its industry-specific solutions appear to have helped it build critical partnerships, and enabling customers to capitalize on generative AI has likely strengthened such ties.

It has collaborated with oil giant Baker Hughes since 2019. Also, Amazon's Amazon Web Services and Microsoft's Azure have extended partnerships, indicating that its solutions add value.

However, other developments give investors good reason to question the investment case for the company. The Baker Hughes partnership comes up for renewal soon, and investors have not received any indications that agreement will continue.

Additionally, macro concerns are weighing on stocks. Between the uncertain economy and geopolitical tensions, investors have questioned whether they want to stay in the stock.

Financial difficulties

Furthermore, the company's financials may also make investors reluctant to own this stock, at least when looking beyond the surface.

For the first nine months of fiscal 2025, it earned over $280 million in total revenue. That also meant that its gross margin rose to 60% versus 57% in the first nine months of fiscal 2023, an indication of its stronger revenue relative to the cost of its services.

Still, in the third quarter of its fiscal 2025 (ended Jan. 31), revenue grew 26% year over year to $99 million, ending a seven-quarter streak of accelerating revenue growth as it could not match the 29% rate of increase in its second quarter.

Also, costs and expenses for Q3 came in at more than $516 million, 84% more than its revenue. That amounted to a net loss of $209 million. While that was only a slight drop from the $206 million lost in fiscal 2024, it is likely discouraging for investors looking for financial improvements.

Moreover, that loss is more than the company's $174 million in stock-based compensation in the first nine months of the fiscal year. That means that even with just $2 million spent during that period on property and equipment, free cash flow was just under negative $55 million.

Furthermore, its fiscal Q4 revenue guidance ranges between $104 million and $114 million. That implies a 25% revenue growth rate at the midpoint. Although this does not necessarily point to slowing growth, it will likely do little to address the massive gulf between the company's revenue and its costs and expenses.

Valuation may also do little to bolster the case for C3.ai stock. Without any profits, it does not have a P/E ratio, and although its price-to-sales (P/S) ratio of 7 is its lowest in more than two years, the company's inability to cover its operating expenses and negative free cash flow likely negate this favorable valuation.

Avoid C3.ai stock

Considering the company's financial challenges and uncertain relationship with its largest client, staying away from C3.ai stock is probably a wise decision. Indeed, its enterprise software and critical partners bode well for the prospects of C3.ai's technology.

Unfortunately, with the Baker Hughes relationship uncertain, it could mean a significant hit to its revenue at a time when it cannot bring in enough cash to meet its costs and expenses. Moreover, its massive expenses relative to revenue could deter growth, even with a reasonable valuation.

Until its financials improve significantly, investors are probably best served by staying on the sidelines.