C3.ai (AI 1.92%) and Palantir (PLTR +0.06%) represent two different plays on the secular growth of the enterprise AI software market. C3 develops AI algorithms that can be integrated into an organization's existing software to automate tasks, improve employee safety, cut costs, and detect fraud. Palantir's platform accumulates large amounts of information from disparate sources to help organizations make better data-driven decisions.
When I compared these two volatile stocks nearly a year ago, I concluded that Palantir's more consistent growth, its lack of customer concentration issues, and more manageable losses made it a better buy than C3. But since then, Palantir's stock has declined 19% as C3's stock rose 29%. Did I make the wrong call, or will Palantir still outperform C3 over the long run?
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Why did C3's stock bounce back?
C3 served 236 customers at the end of the second quarter of fiscal 2023 (which ended last October). It primarily serves large customers across the energy, industrial, and government markets, but it generates nearly a third of its revenues through a joint venture with the energy giant Baker Hughes (BKR +1.82%). That vital partnership will expire in C3's fiscal 2025 (which will end in April 2025) -- and there's no guarantee it will be renewed.
C3 has been bracing for that potential loss by signing new deals with Alphabet's Google Cloud, Microsoft, Raytheon, and the U.S. Department of Defense, but the macroeconomic headwinds have still curbed its growth over the past year. Its revenue rose 38% in fiscal 2022, but it expects just 1% to 7% growth in fiscal 2023.
NYSE: AI
Key Data Points
Last year, C3 pivoted from a subscription-based model, which is stickier and generates more predictable recurring revenues, to a usage-based one which allows customers to merely pay for the services they access. C3 insists that the shift was necessary to give it more options for growing its sales in a tough market, but it could also reduce its near-term sales.
As C3's growth cools off, it continues to drown in red ink. Its net loss more than tripled to $192 million (from just $253 million in sales) in fiscal 2022, and analysts anticipate an even wider net loss of $304 million in fiscal 2023.
C3's glaring weaknesses caused its stock to plunge 64% in 2022. However, it's risen more than 130% this year for one simple reason: the public's fascination with OpenAI's ChatGPT platform, which is backed by C3's partner Microsoft. C3's announcement that it would launch new tools for "generative AI" platforms like ChatGPT sent its stock skyrocketing -- even if those tools won't move the needle for C3's core business anytime soon.
Why did Palantir's stock stumble?
Palantir operates two data mining platforms: Gotham, which is designed for government agencies, and Foundry, which serves large commercial customers across the energy, industrial, financial, and aerospace sectors. When Palantir went public in 2020, it boldly claimed Gotham could become the "default operating system for data across the U.S. government" as Foundry expanded its reach across the private sector.
Those claims were backed by Palantir's impressive track record. The U.S. military reportedly used Gotham to track down Osama Bin Laden in 2011, Immigration and Customs Enforcement (ICE) used it to track and deport undocumented immigrants for years, and most of America's military and law enforcement agencies already use customized versions of its software. That battle-hardened reputation would likely bolster Foundry's appeal among large companies.
NASDAQ: PLTR
Key Data Points
Palantir's revenue rose 41% in 2021, but it expects just 23% growth in 2022. The slowdown was caused by the simultaneous slowdown of Gotham, which faced tougher competition from third-party data mining platforms and internally developed alternatives across U.S. government agencies; and Foundry, which struggled as the macroeconomic headwinds forced large companies to rein in their spending on big software upgrades.
Like C3, Palantir also remained unprofitable as its sales growth cooled off. However, its net loss narrowed from $1.12 billion to $520 million in 2021 (from $1.54 billion in sales), and analysts expect an even narrower net loss of $478 million in 2022. Therefore, Palantir's losses still look a lot more manageable than C3's.
Palantir is also still sticking with a subscription-based model instead of hastily pivoting its customers toward usage-based fees like C3. It also doesn't suffer from any major customer concentration issues; none of its top customers accounted for more than 10% of its total revenue in 2021. However, Palantir's stock notably wasn't lifted by the same ChatGPT hype as C3 this year since it's a data processing AI company that doesn't dabble in generative AI tools.
The obvious winner: Palantir
Neither of these AI stocks is cheap yet. C3 trades at 11 times its fiscal 2023 sales, while Palantir trades at 9 times its 2022 sales. However, Palantir is still clearly the superior company -- its growth rates are more stable, it isn't heavily dependent on a single customer, and its losses are narrowing. C3's recent rally was driven by hype instead of any real improvements, so investors shouldn't be too surprised if it suddenly gives up its recent gains.
