Palantir vs. C3.ai: Which Is Best?

AI stocks have recently emerged as the new driver of market growth, fueled by the success of generative AI technologies like ChatGPT.

Two of the key beneficiaries of the AI surge have been C3.ai (NYSE:AI) and Palantir Technologies (NYSE:PLTR).

These stocks have risen 207 percent and 122 percent YTD, respectively. In comparing Palantir vs C3.ai stock, which is best?

Palantir

Data analytics firm Palantir has recently achieved a slim level of profitability, helping to propel its stock toward 52-week highs.

The company recently reported its second consecutive quarter of positive GAAP earnings, and management projects a full year of profitability.

Over the coming 12 months, analysts expect Palantir’s earnings to double from $0.05 per share to $0.10 per share.

In the most recent quarter, revenues rose 18 percent over the previous year. And management expects to generate up to $2.235 billion in total revenue this year.

Assuming the company can maintain or extend its positive net margins, increasing revenues could lead to considerably higher future earnings.

Source: Pixabay

The company is also moving heavily into the AI space. Palantir has recently introduced a new AI platform that, among other capabilities, can devise real-world military plans. This platform is initially being offered only to select existing clients, but a wider rollout is expected in the relatively near future.

Investors should note a slight shift in Palantir’s recent financial strategy. Between the end of Q4 and the end of Q1, Palantir’s cash reserve dropped from $2.599 billion to $1.265 billion.

Under other circumstances, this drop would seem extreme. However, it was offset by an increase in the company’s marketable securities from $35.16 million to $1.640 billion. This shift from cash to marketable securities may allow Palantir to earn more from its sizable cash stockpile.

For all of its potential, Palantir has likely been driven up well beyond its justifiable value. At 66.8 times expected earnings, the stock is anything but cheap.

It should be noted, however, that Palantir’s price-to-earnings-growth ratio is just 1.17. This indicates that future growth could support the company’s valuation, but slower-than-expected growth could leave the stock substantially overvalued.

Palantir also lacks a concrete strategy for its AI business. Despite planning an aggressive expansion, Palantir has yet to develop a pricing model that will allow it to make its AI platform reliably profitable. This represents a risk for investors, as Palantir seems to be putting the cart before the horse when it comes to building out its artificial intelligence business plan.

C3.ai

Like many AI-related companies, C3.ai has seen improvements in its fundamentals over the last year as more businesses have invested in AI technology. In the last fiscal year, C3.ai’s revenues grew 5.6 percent, including an 11.4 percent increase in recurring subscription revenue.

On a GAAP basis, the company lost $2.45 per share. Analysts do, however, expect C3.ai’s losses to pull back to about $1.88 per share in the coming 12 months.

C3.ai also has the advantage of being a leader in an addressable market that is expanding at lightning speeds. By 2025, the company’s addressable market could be as large as $37 billion.

While competition in the AI market is increasing rapidly, C3.ai is an established name with a well-known software platform. Due to this, C3.ai maintains a first-mover advantage over Palantir and other competitors.

On the downside, however, C3.ai is a woefully unprofitable company. Over the trailing 12-month period, the company’s net losses have totaled $268.84 million. C3.ai is also burning through its cash stockpile at an alarming rate.

In Q1, C3.ai reported $284.83 million of cash on hand, down from $339.53 million the year before. The company’s short-term investments likewise dropped from $620.63 million to $446.16 million. This rapid depletion of cash and short-term investments could be worrisome for investors if the company cannot pare its losses soon.

C3.ai is also facing a new set of misreporting allegations from short sellers. The accusers suggest that C3.ai has reported artificially high margins and misrepresented its revenues. Needless to say, any investor considering buying AI stock should take these allegations seriously.

Which Stock Is the Better Investment?

In terms of valuation, both Palantir and C3.ai look quite expensive. Palantir trades at 14.97 times sales, while C3.ai comes in only slightly lower at 14.04. Neither company carries long-term debt.

In the value category, however, Palantir gains a distinct edge by virtue of generating positive earnings. This is especially true in light of C3.ai’s rate of cash burn.

Palantir also has a more compelling investment thesis overall. Even with C3.ai’s advantage of being an established name in the AI software space, it is not generating the kind of revenue growth that Palantir is. Without considerable growth in this area, it’s difficult to predict if or when C3.ai will achieve profitability.

The final point in Palantir’s favor is its comparatively light short-selling. About 8.4 percent of Palantir’s float has been sold short, sharply contrasted by C3.ai’s 35.7 percent. This indicates strongly negative sentiment toward C3.ai that could cause share prices to fall back to earth sooner rather than later. Given how much of the current AI surge is being driven by investor sentiment, such a bearish outlook on C3.ai could play out poorly for the stock’s near-term returns.

Ultimately, Palantir comes out on top as the better investment between these two trending AI stocks. Although it may well be overvalued, Palantir’s move to positive earnings and more rapid revenue growth both put it at a marked advantage to C3.ai.

When C3.ai’s cash burn rate and the allegations of financial misreporting are added into the equation, Palantir emerges as a clear victor. It should be noted, however, that both of these companies are risky buys as high-growth stocks with massive valuations.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.