When considering software companies with artificial intelligence (AI) capabilities as potential investments, two immediately come to mind: C3.ai (AI 3.02%) and Palantir Technologies (PLTR 3.73%). Both companies have integrated AI into their products for many years, and the current investment interest validates what each company has long held to be true.
But which one makes for the better buy? Let's find out.
Product
Both C3.ai and Palantir are aimed at helping their customers make better decisions. C3.ai has products in multiple fields but specializes in the oil and gas industry. For example, Shell uses C3.ai's products to monitor more than 10,000 pieces of equipment and uses a predictive maintenance program to identify potential failures before they happen.
Palantir's products are similar. They provide clients with predictive modeling to help inform decisions. It started by catering to government entities, which still makes up the majority of the business. However, it is heavily expanding into other commercial industries, giving Palantir a much wider footprint than C3.ai.
Even though C3.ai has some government contracts, it's not nearly as many as its rival. I think Palantir has the leg up here.
Winner: Palantir
Revenue
Looking at each company's finances reveals quite a stark contrast. Palantir's revenue growth has slowed in recent quarters, but the company still posted respectable 18% growth in Q1. Conversely, C3.ai's revenue was flat during its fourth quarter of fiscal 2023 (which ended April 30).
Not all of this can be attributed to how C3.ai's customers are spending, because the company changed its billing model from subscription to consumption at the end of its fiscal 2023's first quarter. Because of that switch, it is experiencing difficult comparisons, and investors will only get a meaningful revenue growth number in the second quarter of fiscal 2024.
This is reflected in C3.ai's fiscal 2024 revenue guidance of $308 million, indicating 15% growth. Compared to Palantir's $2.21 billion revenue guidance with 16% growth, the full-year total doesn't quite measure up.
Winner: Palantir
Profits
Palantir has worked hard to achieve profitability recently and has produced earnings per share (EPS) of $0.01 in each of the past two quarters. While that's not an Earth-shattering figure, it's a strong start. Further, management improved its guidance for 2023 to produce GAAP profits every quarter.
As for C3.ai, its profits are nowhere in sight. In Q4 of its fiscal 2023, C3.ai posted an abysmal profit loss margin of 101%. That means its losses are more than double the revenue it brought in.
This is a slightly unfair comparison because Palantir is a much more mature company with larger revenue streams. Still, C3.ai has dug itself into a deep hole, and it will have a hard time getting out. Palantir has already emerged into profitability, making it a clear winner.
Winner: Palantir
Stock valuation
Even though Palantir has produced some profits, they're not nearly enough to value the company that way. As a result, it's best to compare the one thing these two businesses have in common from a financial standpoint: revenue. Using the price-to-sales (P/S) ratio, we can see how much we're paying for each dollar of sales these companies generate.
PLTR PS Ratio data by YCharts.
As you can see, each has seen a significant run-up in valuation since AI became a strong investment theme when first-quarter results were reported at the beginning of May. Now, each stock trades at a fairly expensive P/S ratio. Due to their similar valuation levels and recent run-ups, I can't call either a winner here.
Winner: None
Conclusion
With Palantir notching up three wins, no losses, and one tie, it's the clear winner for this comparison. C3.ai is a very young company, and a lot of question marks surround the business.
Palantir is the better buy here, but investors must be careful due to its recent run-up in valuation. Establishing a small position is fine, but going all-in on the stock as your one AI-focused investment would not be wise right now.
