Better Artificial Intelligence (AI) Stock: Palantir Vs. C3. have

Two names that have emerged alongside technology giants on the artificial intelligence (AI) scene are enterprise software companies Palantir Technologies (PLTR -2.93%) and C3. have (AI -0.69%).

While each company has done an impressive job breaking into the AI ​​market, I see one of them as a superior long-term investment.

Let’s break down the ins and outs of Palantir and C3.ai and explore what each has to offer.

1. The case for and against Palantir

Palantir sells data analysis software to the private sector as well as the US government and its Western allies.

For the 12 months ended June 30, Palantir boasted 593 total customers — a 41% year-over-year increase. While this has helped the company accelerate its revenue, I believe the unit economics of the entire business are more important.

For the quarter ended June 30, Palantir’s operating income was $105 million. This was roughly a tenfold increase from the second quarter of 2023. The combination of growing revenue and a disciplined cost structure has fueled impressive levels of profitability for Palantir, which the company can reinvest in the business.

My only word of caution when it comes to investing in Palantir has to do with valuation. Palantir’s market capitalization is around $70 billion — quite a lot for a company that generated $2.5 billion in the last 12 months.

PLTR Price to Free Cash Flow Data by YCharts

With a price-to-free cash flow (P/FCF) ratio of 109, Palantir stock is far from cheap. Furthermore, the chart above clearly shows that Palantir’s valuation has seen quite a bit of expansion throughout 2024.

While this dynamic might make Palantir unattractive to some investors, let’s take a look at C3.ai before making a firm decision on which company might be the best option.

Image source: Getty Images.

2. Case for and against C3.ai

C3.ai sells software to several different end markets, including energy, manufacturing, defense, financial services and healthcare. In addition, the company has a deep network of partners with major cloud providers and consulting firms such as Amazon, Alphabet, Microsoft, Accentureand Booz Allen Hamilton.

In late May, C3.ai reported earnings for the fiscal year ended April 30.

For the 12 months ended April 30, C3.ai generated $310 million in revenue. While this represented a respectable 16% year-over-year growth, there are some glitches in C3.ai’s business.

The company’s gross profit was basically flat year over year, while operating losses and net losses were actually slightly higher.

AI Operating Income (TTM) data by YCharts

This financial picture implies that C3.ai is paying a high price for its growth. It is not sustainable to finance unprofitable growth in the long term. Because of this, C3.ai could very well be looking at a liquidity crunch at some point, which could be detrimental to the business.

The bottom line

Navigating growth stocks can be difficult. Software-as-a-service (SaaS) companies in particular can be a beacon for attention — but that doesn’t always translate into a prudent investment choice.

To me, investing in C3.ai is simply high risk compared to Palantir. Palantir generates more revenue in a quarter than C3.ai does in an entire year. Additionally, Palantir is steadily growing its business in a profitable manner, while C3.ai continues to generate cash.

Despite its rich price, investing in Palantir could be justified right now. The long-term outlook for AI remains bullish, and given Palantir’s unique position between the private and public sectors, the company’s outlook looks bright. Alternatively, C3.ai has yet to prove that it can disrupt its peers and affect their market position.

For these reasons, I see Palantir as the superior investment choice over C3.ai, and I think long-term investors will be handsomely rewarded if they exercise a little patience.

A good approach to investing in a stock like Palantir is to use dollar cost averaging. This strategy will allow you to invest in Palantir at different price points over time, which helps mitigate risk. Investors looking for some exposure to emerging AI opportunities may want to consider a position in Palantir right now.