C3.ai (AI -1.47%) and Snowflake (SNOW 0.41%) are intriguing tech companies that could facilitate and benefit from revolutionary long-term trends, but both stocks have seen big pullbacks lately.
Despite surging interest in artificial intelligence (AI), C3.ai's accounting practices were recently called into question by a letter from a short seller, and the company's share price trades down roughly 87% from its high. Meanwhile, Snowflake stock has seen big sell-offs due to slowing sales growth and macroeconomic pressures, and its share price is down 87% from its peak.
Which of these high-risk, high-reward stocks looks like the better buy right now? Read on for competing bull cases on these companies and a determination of which stock is ultimately the better buy.
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The case for C3.ai stock
While C3.ai stock struggled in 2022 due to the challenging backdrop for growth stocks and a slowdown in revenue that occurred in conjunction with a switch from a subscription-based model to a consumption-based model, it had been benefiting from momentum for AI stocks this year. The bullish rally was cut short after Kerrisdale Capital published a letter to the company's auditors alleging improprieties in the way the company reported revenue, gross margins, and unbilled receivables.
While Kerrisdale's report deserves consideration from investors and includes critiques that C3.ai will need to address and nullify with future performance, there's a possibility that the passage of time will ultimately recast the letter's concerns as misplaced. If subsequent earnings reports or other updates show that Kerrisdale's criticisms were exaggerated or even unfounded, the stock could bounce back quickly and go on to enjoy further bullish momentum amid surging interest in AI technologies.
C3.ai's guidance for its fiscal year, concluding at the end of this month, suggests that annual sales will be up by roughly 5%. With the company reporting bookings and unbilled revenue at a faster pace, it anticipates that sales will grow by roughly 30% in its next fiscal year. C3.ai's management has forecast that the business will shift into being profitable on a non-GAAP (adjusted) basis in its next fiscal year. If the company delivers on these targets and debuts impressive new generative AI services, the stock could see big gains from current pricing levels.
The case for Snowflake stock
While Snowflake isn't a pure-play AI company, its technologies are already being used by customers to power artificial intelligence applications and projects. Data gathering, storage, and analysis are at the heart of artificial intelligence, and Snowflake's Data Cloud platform makes it possible to combine and analyze data from otherwise siloed cloud infrastructure platforms. In addition to AI, these capabilities are valuable for a wide range of other analytics and software applications.
While Snowflake has been posting stellar sales growth and is on track to grow revenue at a solid clip this year, the business is seeing expansion momentum slow in the face of macroeconomic pressures. The data services specialist grew product revenue by approximately 70% last year to reach $1.94 billion, and it also posted an adjusted free-cash-flow margin of 25% in the period. Management expects to once again post an adjusted FCF margin of 25% this year, but it anticipates that product revenue growth will decelerate to approximately 40%.
No doubt about it, the growth slowdown looks substantial, but it should be viewed in the context of the macro headwinds at hand.
Facing softness in some segments of the economy and uncertainty on the horizon, Snowflake has seen some customers shift toward smaller, short-term consumption contracts. This trend was largely concentrated among small and medium-sized businesses, international customers, and commercial customers, but demand from large-enterprise customers has continued to look stronger.
The enterprise customer segment remains the most important part of Snowflake's growth engine, and it's possible that the short-term contracts currently favored by smaller customers won't meaningfully disrupt bookings growth over a longer timeline.
So which is the better buy?
Based on a quick look at both companies' forward price-to-sales ratios, Snowflake might look like the more expensive stock when compared to C3.ai, but these valuation metrics have to be viewed in relation to other factors.
AI PS Ratio (Forward) data by YCharts.
As it's trading at roughly 16.6 times this year's expected sales, there's no question that Snowflake has a highly growth-dependent valuation. On the other hand, the data services specialist has already grown revenue at a rapid pace over the last few years, and its projected 40% product revenue growth this year still looks solid, given the current batch of macro pressures. Meanwhile, C3.ai's performance has been much more uneven, and I have less confidence in the business hitting management's sales and profitability targets for the next fiscal year.
Additionally, Snowflake is already serving up encouraging FCF margins on an adjusted basis. With the company valued at roughly $48 billion and trading at 32.5 times forward FCF, some strong performance is already priced into the stock, but I think the company's revenue momentum, growth opportunities, and margins support it.
Alternatively, C3.ai is still a relatively small company with a market cap of roughly $2.6 billion and could see explosive tailwinds from AI trends, but its outlook is much more speculative. While C3.ai's much smaller market capitalization potentially opens the door for it to see more dramatic growth, I think that Snowflake looks like the better buy.
