Palantir Technologies Stock: Is It A Better Long-Term Option Than C3.ai In The Expanding AI Market?

Palantir (PLTR -2.27%) and C3.ai (AI 2.28%) both use AI-powered solutions to assist organizations and businesses crunch data.

Palantir, which derives more than half of its revenue from federal contracts, aspires to make its Gotham platform the “default operating system for data” across the United States government. The Foundry platform supplies major commercial customers with data-mining tools.

C3.ai works with a diverse set of clients in the commercial, industrial, and government sectors. The majority of its revenue comes from energy conglomerates such as Baker Hughes and ENGIE.

Palantir, which went public through a direct listing in September, began trading at $10 per share, soared to the high $30s in February, and is now trading in the mid-$20s. C3.ai went public last December at $42 per share in an IPO, launched at $100 on the first day, and now trades in the mid $60s.

Both equities have lagged the S&P 500 this year as investors shift from growth to value stocks, but which is a stronger long-term option in the expanding AI market?

The distinctions between Palantir and C3.ai

Palantir, named after the Lord of the Rings’ all-seeing orbs, assists organizations in gathering data on individuals from different sources, then processing it with algorithms to make data-driven decisions.

The US government is Palantir’s largest customer, and its technologies are used by the CIA, FBI, ICE, and all branches of the military. Its technology was supposedly used to track down Osama bin Laden in 2011, but it has also been utilized by ICE to locate and deport unauthorized immigrants in recent years.

C3.ai began by serving primarily energy corporations before extending into other areas. In contrast to Palantir, which collects data from both external and internal sources, C3.ai focuses on a company’s internal processes.

The algorithms developed by C3.ai can schedule maintenance routines, detect fraud, optimize inventories, and improve CRM (customer relationship management) systems. In short, it’s a much less contentious bet than Palantir.

How quickly is Palantir expanding?

In 2021, Palantir’s revenue climbed 47% to $1.1 billion. Its government revenue increased by 70% while its commercial revenue increased by 22%.

It extended its government contracts with the FDA, the United States Army, and the United States Air Force, and its commercial business attracted major customers such as Rio Tinto, PG&E, and BP. Although its adjusted gross and operating margins increased, it nevertheless lost $1.2 billion, compared to a loss of $580 million in 2020.

Palantir’s sales increased 49% year on year to $341 million in the first quarter of 2021, with 76% growth in its government business and 19% growth in its commercial division. Although its adjusted gross and operating margins increased, its net loss increased from $54.3 million to $123.5 million. 

On the plus side, its adjusted EBITDA went positive with a profit of $119.8 million, but that figure excludes stock-based compensation and a slew of “one-time” charges.

Wall Street forecasts Palantir’s revenue to reach 35% this year, while the business anticipates annual revenue increases of more than 30% through 2025. That upbeat prognosis reflects the corporation’s expectation that its government business would remain stable while it gradually obtains more commercial customers, but the company might be mired in data-gathering controversy and highly unprofitable for years to come.

How quickly is C3.ai expanding?

In fiscal 2022, which ended in April, C3.ai’s revenue increased by 17% to $183.2 million. This was a dramatic deceleration from 2021’s 71% growth, owing primarily to pandemic-related disruptions in the energy and manufacturing sectors.

Its average contract value fell from $12.1 million in 2021 to $7.2 million in 2022, despite the fact that it launched new corporate AI projects with major customers such as 3M, Consolidated Edison, Shell, and the New York Power Authority. 

Nonetheless, its overall number of customers increased 82% to 89 by the end of the year, indicating that its business could recover swiftly once the pandemic is finished. It anticipates a 33% to 35% growth in sales in the current fiscal year.

C3.ai’s adjusted gross margin remained constant in fiscal 2021, while its operating margin remained negative, but its net loss shrank from $69.4 million to $55.7 million. It does not report profits in adjusted EBITDA terms, and analysts predict that it will remain unprofitable for the foreseeable future.

The verdict and valuations

Palantir and C3.ai are currently trading at 31 and 26 times this year’s sales, respectively. These high price-to-sales ratios suggest that neither firm is inexpensive in the current market, particularly when investors shift from growth to value equities.

Therefore, it makes more sense to invest in a company that is more reliant on solid government customers than on the macro-sensitive energy and industrial sectors. If competing equities have comparable price-to-sales ratios, it makes more sense to invest in the company with higher revenue growth.

As a result, while Palantir may be more divisive than C3.ai, I believe it is the better growth option in the AI business. C3.ai’s long-term prospects remain promising, but its stock remains overpriced in comparison to its growth.

Conclusion

In the expanding AI market, Palantir and C3.ai are two companies that use AI-powered solutions to help organizations and businesses analyze data. While Palantir has a larger government customer base and a more controversial history, C3.ai focuses on a company’s internal processes, making it a less contentious bet. Both companies have high price-to-sales ratios and have underperformed the market this year.

Despite this, Palantir’s revenue has increased significantly in 2021, and it has extended its government contracts while attracting major commercial customers. Wall Street forecasts its revenue to increase by 35% this year, and it anticipates annual revenue increases of more than 30% through 2025. In contrast, C3.ai’s revenue growth has decelerated due to pandemic-related disruptions in the energy and manufacturing sectors, but its overall number of customers has increased.

Considering these factors, while both companies have promising long-term prospects, Palantir appears to be the better growth option in the AI business. Its revenue growth is expected to remain strong, and its focus on government contracts and commercial customers could lead to stable and sustainable growt

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