From Wall Street to retail investors, the prospects of artificial intelligence (AI) are not going unnoticed. Big tech enterprises such as Alphabet, Microsoft, and Amazon are investing billions in artificial intelligence (AI) to expand their existing platforms' capabilities. While the moves from big tech's leaders are garnering attention from hedge fund managers and media outlets alike, there are many other companies worth paying attention to for investors.
Palantir (PLTR 3.73%), the big data company founded by Silicon Valley legend Peter Thiel, works closely with the U.S. government, competing with businesses such as C3.ai (AI 3.02%).
However, throughout the past year, Palantir has demonstrated that it is far more than a government contractor, as evidenced by its rising number of private sector clients and unprecedented customer demand. Let's dig into the progress both Palantir and C3.ai have made as they build out their AI roadmaps. By the end of the analysis, I believe one stock will emerge as the clear winner.
1. Palantir
Earlier this year, Palantir was the subject of a short report that alleged the company is more of a consulting operation rather than a pure software company. Over the last several months Palantir has faced that criticism head-on thanks in large part to its satisfied customers. The company showcased its capabilities during a public demo day with clients including Cisco and HCA Healthcare sharing how Palantir's products have helped them better identify artificial intelligence use cases and the insights that are derived from the company's products.
To get a sense of how artificial intelligence is impacting Palantir's business from a financial perspective, consider the company's first-half results. Through June 30, Palantir generated $1.1 billion in revenue, which represented 15% growth year over year. Even better, Palantir has reached consistent positive free cash flow, and posted $285 million in the first half of the year.
While these results are encouraging, some on Wall Street think the company's growth profile is muted compared to the competition. I would argue that view is a bit shortsighted. For instance, at present, the average revenue it generated over the last 12 months from its top 20 clients is $53 million. Given that AI is in its early innings and companies are still working on figuring out how to best deploy tools such as large language models and generative AI, my belief is that its average revenue profile will increase exponentially over the next few years. Furthermore, investors should consider just how many end markets Palantir serves. According to its website, Palantir's software is used in areas including combating money laundering, hospital operations, retail, semiconductors, and supply chain logistics.
At the end of the day, I find it hard to discount Palantir as a top player in AI, and view the business as far more prolific than a government contractor.
Image source: Getty Images.
2. C3.ai
When parsing C3.ai's latest investor presentation, it's hard not to notice the caliber of partnerships the company has developed. C3.ai works with the likes of Amazon Web Services, Google Cloud Platform, consulting firm Accenture, and defense contractor Raytheon. Although this is an impressive roster of lead generation partners, C3.ai's actual financial results look far more mundane.
For the fiscal quarter that ended July 31, C3.ai reported total revenue of $72.4 million. Revenue from software licenses was $61.4 million, representing only 8% growth year over year. Moreover, management is guiding for total revenue between $295 million and $320 million for the full fiscal year. On top of that, the company is not yet generating positive free cash flow.
The majority of C3.ai's bookings stem from the defense sector. Having nearly 70% of the business concentrated in one sector could be seen as a huge risk. While the company claims to be seeing a lot of demand for its generative AI applications from the energy and utility sectors, investors have yet to see any concrete results based on sales into those sectors.
C3.ai's stock likely benefited from the euphoria around AI earlier this year and was riding the momentum. But as often happens with stocks whose movements are based heavily on buzz, the market eventually caught on. C3.ai's stock price has declined by more than 30% in just the last three months. The investment community appears to be moving on from C3.ai as big tech and rivals such as Palantir continue to invest aggressively in AI development.
Which AI stock is a better investment now?
The disparity between Palantir and C3.ai is striking. Palantir generated more revenue in a single quarter than C3.ai is forecasting for the entire year -- and it's doing so in a profitable manner. While big tech represents a good way to invest in artificial intelligence and gain exposure to operations such as OpenAI, I'd encourage investors to seek other opportunities.
Owning growth stocks can, at times, be challenging for some investors given the volatility they experience in relation to steadier blue chip names. However, Palantir seems to be moving in the right direction on all fronts -- from revenue growth to profitability and customer satisfaction. Therefore, while the company may not be grabbing as many headlines as its rivals, I see few reasons to pass on it as an investment opportunity. From my perspective, Palantir is not competing with C3.ai. It is competing with the biggest tech enterprises out there, and winning over some of the world's largest corporations as clients.
Investors should employ a long-term mindset when it comes to investing in AI, as it will likely take a couple of years before the real winners begin to separate themselves from the pack. For now, Palantir looks like a terrific opportunity to invest in the AI arena that also provides exposure to several different industries. C3.ai, on the other hand, is more reminiscent of a tumbleweed -- it's still operating, but going about its business almost aimlessly as it struggles to keep up. My strategy would be to dollar-cost average your way into a Palantir stock position over time, and take advantage of the long-term secular tailwinds helping fuel it to the next frontier.
