Enterprise software company C3.ai (AI 3.85%) has ridden the hype for artificial intelligence (AI) to impressive lengths in 2023. Share prices are up nearly 160% since January. However, they've fallen roughly 35% since the start of August as the red-hot tech sector catches its breath.

But I'm not interested in buying shares of C3.ai despite the recent pullback. When you look at the company, some red flags stand out that should make investors think twice before risking their hard-earned money on this tech growth stock.

Here is why C3.ai is not the AI stock to put your money behind.

C3.ai has an uncertain growth outlook

C3.ai builds software applications for companies that use artificial intelligence to analyze data, optimize operations, or do whatever else they are programmed to do. AI software processes tremendous amounts of data to produce outcomes human analysts can't. For example, C3.ai uses AI to optimize demand and production schedules with a global food manufacturer. It can find and solve supply chain inefficiencies. There are AI use cases in virtually every industry.

The company changed its billing method from a subscription model to consumption-based billing at the end of 2022, which it argued was becoming a standard in the cloud industry. Since C3.ai's software is used more as it's implemented deeper into a company's operations over time, this temporarily stunted revenue growth, which you can see below. Management is guiding for the beginning of a rebound: Revenue growth for the company's fiscal 2024 first quarter is expected to be between 7% and 11% year over year.

AI Revenue (Quarterly YoY Growth) Chart

AI Revenue (Quarterly YoY Growth) data by YCharts

However, a consumption-based model can make projecting the business more difficult. Look further out, and management's full-fiscal-2024 guidance for revenue growth widens its spread to between 11% and 20%. The company reports its Q1 earnings for fiscal 2024 (the quarter ended July 31) next month, and investors should seek growth guidance with a narrower range.

C3.ai suffers from intense shareholder dilution

C3.ai isn't profitable yet, so the company issues shares of stock to help pay employees. It's a common practice that helps a business conserve cash that would otherwise go toward wages. However, too much stock-based compensation and outstanding shares will rise and begin lowering the value of existing shares. It's like cutting a pie into more slices: the pie doesn't get bigger; everyone's slices are smaller.

You can see below that C3.ai has issued a whopping $216 million in stock-based compensation over the past year, almost as much as its revenue. C3.ai went public less than three years ago, and outstanding shares have grown by 20% already.

AI Stock Based Compensation (TTM) Chart

AI Stock Based Compensation (TTM) data by YCharts

The business hopes to turn operating margin positive on a non-GAAP (adjusted) basis over the next four quarters, but there's a much less certain timeline for GAAP profitability. Net losses are $269 million over the past year and still trending lower. Investors must consider how much more stock-based compensation might be issued between now and when the company can consistently turn profits.

C3.ai's business is difficult to evaluate

There is wisdom in investing in straightforward businesses that investors can easily digest and evaluate. But C3.ai falls short of that description. Some of it isn't the company's fault. For instance, it's an AI software company, so the typical investor won't use its products or be able to compare them against a competitor's.

But management doesn't make it easier on investors. For example, the company has a wide-ranging customer definition, counting an organization as an entity while defining all groups, divisions, and segments within a given entity as individual customers. In other words, a corporation (one entity) would count as 10 customers if C3.ai's products were used in 10 departments. C3.ai doesn't reveal its entity count, only its customer count.

Add it all up, and it's difficult to paint a complete picture of C3.ai's performance and standing in its marketplace. Management points to an estimated $791 billion addressable market (by 2025) as an opportunity, but nailing down how that might translate to C3.ai's growth is tough. Investors should consider approaching with caution until investors can get some answers to the company's many questions.