C3.ai (AI 6.08%) and SentinelOne (S 3.88%) represent two very different ways to invest in the growing artificial intelligence (AI) software market. C3.ai's AI-powered algorithms can be integrated into a company's existing software to improve employee safety, cut costs, and detect fraud. SentinelOne's cybersecurity platform replaces human experts with its AI-powered algorithms.
I compared these two companies back in April and concluded that SentinelOne's faster growth and more diversified customer base made it a more promising investment than C3.ai. But since I wrote that article, both stocks saw their prices decline more than 20% as the bear market dragged on. Let's take a fresh look at both AI stocks to see if my earlier thesis is still valid.
C3.ai faces a severe slowdown
When C3.ai posted its fiscal 2023 first-quarter report at the end of August (for the quarter ending July 31), three red flags appeared. First, management told investors its revenue would only rise 1%-7% in fiscal 2023 (which will end next April), compared to its prior forecast for 22%-25% growth for the year and its 38% growth reported in fiscal 2022. Management blamed that deceleration on macro headwinds and slower enterprise spending.
Second, C3.ai said it would shift from a subscription-based model, which generates stickier recurring revenue, to a consumption-based one, in which its customers would only pay for the services they used. Management said it believes the company can attract smaller customers with this new model -- which could reduce dependence on large energy, industrial, and government clients -- but doing so could also lower competitive barriers it has against similar services.
Lastly, C3.ai's losses widened as growth stalls out. It only generated $253 million in revenue in fiscal 2022, but its net loss widened from $56 million to $192 million. This year, analysts expect its revenue to rise just 3% to $261 million as its net loss widens to $282 million. Those numbers look dismal for a stock that still trades at six times this year's sales.
During the company's latest conference call, CEO Tom Siebel claimed C3.ai's revenue growth would "revert to historical annual growth rates" of over 30% in fiscal 2024 and beyond. However, it's hard to take that rosy forecast too seriously right after C3.ai stunned investors with its steep guidance cut for fiscal 2023.
SentinelOne is still growing like a weed
SentinelOne's revenue surged 120% to $205 million in fiscal 2022 (which ended in January). In its fiscal 2023 second-quarter earnings report released at the end of August, management predicted SentinelOne's revenue would increase 102%-103% in fiscal 2023, which was higher than its previous forecast for 97%-99% growth.
SentinelOne is growing like a weed because it's carved out a defensible niche with its AI-powered extended detection and response (XDR) services. In its latest quarter, its total number of customers grew 60% year over year to 8,600, its number of customers that generated over $100,000 in annual recurring revenue increased 117% to 755, and its dollar-based net revenue retention rate hit a record high of 137%.
But just like C3.ai, SentinelOne is still deeply unprofitable. Its net loss widened from $118 million in fiscal 2021 to $271 million in fiscal 2022, and analysts expect it to post an even wider net loss of $402 million this year.
SentinelOne also operates at lower adjusted gross margins (at around 70%) than other "hypergrowth" cybersecurity companies like CrowdStrike and Zscaler. Therefore, it could struggle to gain enough pricing power to narrow its losses -- especially as diversified competitors like CrowdStrike and Palo Alto Networks expand into the AI-powered XDR space.
The bears believe SentinelOne's growth will eventually cool off and reveal that its business model isn't sustainable. The stock is also still priced for perfection at 20 times this year's sales -- so its upside potential could be limited in this tough market.
SentinelOne is still the better buy
Both of these AI stocks trade at discounts to their IPO prices. However, C3.ai trades much further below its IPO price than SentinelOne because it clearly faces more near-term hurdles. As I said back in April, I wouldn't rush to buy either stock right now as rising rates curb the market's appetite for unprofitable tech companies. But if I had to choose one, I'd pick SentinelOne again because its growth rates are higher and it seems much more resistant to macro headwinds.