Investors quickly took notice of C3.ai (AI 0.49%) when the company burst onto the IPO scene back in 2020. Back then, the AI software provider was hailed as the next big thing in AI tech, allowing companies to use machine learning algorithms to generate insights and sift through large data sets. 

Fast forward a few years and the company still catches the attention of investors, but much of its initial shimmer has faded. Its share price is down 75% since going public, and its financial situation has put some investors on edge. 

But if you're still on the fence about whether or not you should devote some money to C3.ai's stock, here are three things you should know first. 

A person looking at a laptop.

Image source: Getty Images.

1. Competition is heating up 

C3.ai has partnered with some major technology companies already, including Amazon, Microsoft, and Google, but the problem is that these tech giants are now becoming rivals. Microsoft and Google in particular have made additional moves into cloud-computing AI services recently, putting pressure on C3.ai.

The increase in competition helped lead C3.ai to transition away from a subscription model for its AI services to a usage-based model where customers only pay for what they use. While that could prove to be a smart move in the long run, it's not helping the company fend off rivals in the $500 billion AI-powered software market.

Microsoft is stealing the AI show right now with its initial investment in OpenAI, maker of the popular large language model ChatGPT. The chatbot already has more than 100 million monthly active users, and Microsoft has integrated it into its Azure cloud services, Bing search, and its Microsoft 365 suite of apps. 

All of the above doesn't count C3.ai out of the AI race, but it does show that the company is far from the only AI game in town.

2. Its financials are pretty rough right now 

While C3.ai has caught the attention of a lot of investors, the company's financial picture isn't all that rosy. 

The company's sales fell 4.5% in the third quarter to $66.7 million, and C3.ai reported a net loss of $63.1 million, which was worse than its loss of $39.4 million in the year-ago quarter. While the company's sales and earnings beat analysts' consensus estimates for the quarter, C3.ai's falling revenue and widening losses should be a red flag for investors. 

Another troubling aspect of C3.ai's financials is the fact that the company receives nearly 30% of its revenue from a single customer, Baker Hughes. That dependency is already proving to be troublesome as Baker Hughes recently cut back on its annual spending to C3.ai and divested 15% of its equity stake in C3.ai last year.

C3.ai could find additional customers to make up for a reduction in sales from Baker Hughes, but that's far from a guarantee, especially as many companies are tightening their belts right now in anticipation of a potential recession. 

And while it has yet to be proven, the company was recently accused of accounting fraud, which has shaken some investors' faith in its financial reporting. C3.ai has responded that its accounting is "complete and correct."

3. The stock has a very rich valuation right now

And finally, for investors who are considering buying shares of C3.ai, it's important to know that the stock doesn't come cheap. The company's share price has skyrocketed over 77% over the past six months, thanks in part to the hype surrounding other AI services like ChatGPT. 

The company is still very unprofitable right now, so the best guide for looking at its valuation is C3.ai's price-to-sales (P/S) ratio. Currently, the company's stock has a P/S ratio of 9, which is far higher than the tech sector's average of about 5. This means that C3.ai's stock is trading for a high premium right now, even as the company's sales are slowing and its losses are widening.

For investors looking for a way to tap into the fast-growing AI market, all of the above reasons may give you pause before jumping on board with this popular stock.