C3.ai (AI 3.49%) and Palantir (PLTR +0.56%) represent two different ways to invest in the booming artificial intelligence (AI) market. C3.ai develops data-ingesting AI modules that can be plugged into an organization's existing infrastructure or run as standalone services. Palantir operates two main platforms -- Gotham for its government clients and Foundry for its commercial clients -- that gather data from disparate sources to spot trends and predict future challenges.
C3.ai went public at $42 via a traditional initial public offering (IPO) in December 2020, but it now trades at about $25. It lost its luster as its growth slowed down, it racked up steep losses, and investors fretted over its customer concentration issues. Palantir went public through a direct listing in September 2020, and its stock started trading at $10. Today, it trades at more than $130. The bulls embraced Palantir as it grew rapidly, its profits soared, and it joined the S&P 500 and Nasdaq-100. So is Palantir still a better AI play than C3.ai right now?
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C3.ai is resolving some of its most pressing issues
C3.ai's AI modules can be installed as on-premises software or via hybrid cloud deployments and public cloud infrastructure platforms to automate and accelerate custom tasks. It originally only provided subscription-based services, but in late 2022, it rolled out a consumption-based fee option to attract more customers.
NYSE: AI
Key Data Points
In its fiscal 2023 (which ended in April 2023), C3.ai's revenue only rose 6% as macroeconomic headwinds drove many of its customers to rein in their spending, it faced tougher competition, and its consumption-based option cannibalized its subscription sales. It also faced the looming expiration at the end of its fiscal 2025 of a joint venture with Baker Hughes that accounted for more than 30% of its revenue. Those challenges, along with a declining gross margin and ongoing losses, spooked investors.
However, C3.ai's revenue rose 16% in its fiscal 2024 and grew by 25% in its fiscal 2025. That acceleration was driven by its new generative AI modules; its strategic partnerships with Microsoft, Amazon, and McKinsey; and fresh federal contracts. It expects its revenue to rise by 15% to 25% in fiscal 2026, while analysts on average anticipate 20% growth.
C3.ai also recently renewed its joint venture with Baker Hughes for another three years. That extension should buy it more time to further diversify its customer base. But it's still expected to stay unprofitable for the foreseeable future -- and it isn't a screaming bargain at 8 times this year's expected sales. So while some green shoots are finally appearing, C3.ai's stock probably won't rebound to its IPO price until it meaningfully widens its moat and narrows its losses.
Palantir's business is firing on all cylinders
Palantir initially only provided its data analytics services to U.S. government agencies and the Defense Department, but it has since leveraged its battle-hardened reputation to lock in more commercial customers. Its revenue rose by 17% in 2023, but that was a deceleration from its 24% growth in 2022. It also broadly missed its original goal of growing its revenue by at least 30% annually through 2025.
NASDAQ: PLTR
Key Data Points
That slowdown, which was mainly caused by the challenging macro environment and the uneven timing of when it booked revenues from its government contracts, drove away a lot of its initial investors. But in 2023, it turned profitable for the first time as it reined in its spending and stock-based compensation.
In 2024, Palantir's revenue rose by 29% and its earnings per share (EPS) more than doubled. That acceleration was driven by the expansion of its U.S. commercial business, which recovered for several reasons: The Federal Reserve brought interest rates back down a bit from the levels it raised them to in its battle with inflation; businesses adopted Palantir's AI tools in growing numbers to creating customized applications; and intensifying geopolitical conflicts drove the U.S. government to grant the company new contracts. This year, management expects its revenue to rise 31% and sees the company staying firmly profitable.
From 2024 to 2027, analysts on average expect Palantir's revenue and EPS to grow at compound annual rates of 32% and 50%, respectively. That's an impressive growth trajectory, but its stock looks extremely expensive at 392 times this year's expected earnings and 80 times this year's expected sales. Those valuations suggest it's more of a meme stock than a growth stock. Any bad news (like a slowdown in U.S. government spending or a surprise earnings miss) could abruptly sink it.
The (slightly) better buy: C3.ai
Both of these stocks are tough to recommend right now. But if I had to choose one over the other, I'd suggest nibbling on C3.ai instead of Palantir. Palantir runs a tighter and more profitable ship than C3.ai, but it's simply too overvalued to consider buying. C3.ai is still a speculative play, but it's overcoming some of its biggest issues. If it diversifies its customer base and narrows its losses, it could finally attract a lot more investors.
