Palantir (PLTR 0.75%) and C3.ai (AI -1.33%) both help businesses and government organizations make data-driven decisions. Palantir's Gotham platform collects and mines data from disparate sources for government agencies. Its Foundry platform provides similar services for large enterprise customers. C3.ai's artificial intelligence (AI) algorithms can be integrated into an organization's existing software to streamline its operations, automate tasks, improve employee safety, and detect financial irregularities. It also provides these services as pre-built applications.
Both companies initially dazzled investors with their robust growth rates, but their stocks fizzled out over the past year as inflation, rising interest rates, and geopolitical headwinds sparked a hasty retreat from high-growth tech stocks.
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Palantir went public via a direct listing in September 2020, started trading at $10 per share, and hit an all-time high of $39 during the Reddit-fueled rally in growth stocks last January. But it only trades at about $11 a share today.
C3.ai went public through a traditional IPO in December 2020 at $42 per share. It started trading at $100 on the first day and soared to an all-time high of $177.47 that same month, but now trades at a mere $21 per share.
Let's see why these two high-growth stocks crumbled, and whether or not investors should pick up the broken pieces of either stock in this volatile market.
How fast is Palantir growing?
Palantir's revenue rose 47% in fiscal 2020, then grew 41% to $1.54 billion in fiscal 2021. It expects its annual revenue to grow by at least 30% each year through 2025, which implies it could generate more than $4 billion in revenue by the final year. Analysts expect its revenue to rise 30% in 2022.
In fiscal 2021, Palantir generated 57% of its revenue from government clients and 41% of its revenue from commercial clients. The growth of its government business decelerated throughout 2021, but it offset that slowdown with the accelerating growth of its commercial business. That shift countered the bearish notion that Palantir would struggle to grow its commercial business to reduce its dependence on government contracts.
Palantir remains unprofitable on a generally accepted accounting principles (GAAP) basis, but its GAAP and non-GAAP operating margins have been gradually rising over the past year. On a GAAP basis, analysts expect its net loss to narrow from $520 million in 2021 to $209 million this year.
How fast is C3.ai growing?
C3.ai's revenue rose 71% in fiscal 2020, which ended in April of the calendar year. But in fiscal 2021, its revenue grew just 17% to $183 million as the pandemic disrupted the energy and industrial sectors.
In the first six months of fiscal 2022, C3.ai's revenue rose 35% year over year to $111 million as those headwinds waned. It expects its revenue to grow 35%-37% for the full year, while analysts anticipate 37% growth.
However, C3.ai relied on just two customers -- the oil field services giant Baker Hughes and the French utility company Engie -- to generate 37% of its revenue in the first half of 2022. That customer concentration is worrisome, but C3.ai has recently inked several new deals -- including a $500 million, five-year software delivery agreement with the U.S. Department of Defense -- to address that weakness.
C3.ai remains unprofitable by both GAAP and non-GAAP measures, but its non-GAAP gross margins are also gradually rising. However, analysts still expect its GAAP net loss to widen significantly -- from $56 million in fiscal 2021 to $200 million in fiscal 2022 -- as it ramps up its investments.
The valuations and verdict
Both stocks have been humbled since the frothy "meme stock" rally last year. Palantir trades at about 11 times its fiscal 2022 sales, while C3.ai trades at seven times its comparable fiscal 2023 sales.
Those valuations seem reasonable, but both companies have also been diluting their shares since their public debuts. Palantir's weighted-average share count nearly doubled in fiscal 2021, while C3.ai's weighted-average share count more than tripled year over year in the first half of fiscal 2022.
Palantir and C3.ai still look a lot cheaper than they did a year ago, but they're both risky investments. If I had to buy one right now, I'd choose Palantir, for three simple reasons: It has clearer long-term growth targets, it doesn't suffer any customer concentration issues, and its net losses seem more manageable. However, investors might want to consider taking a look at some other beaten-down tech stocks before pulling the trigger on Palantir.
