Shares of Palantir Technologies (PLTR 3.73%) and C3.ai (AI 3.02%) soared to their all-time highs during the buying frenzy in meme stocks in 2020 and 2021. But as of this writing, Palantir and C3.ai trade 56% and 85% below those record levels, respectively.
Both stocks crumbled for similar reasons: Their revenue growth cooled off and rising interest rates popped their bubbly valuations. But over the past 12 months, Palantir's stock rallied more than 140% as C3's stock surged nearly 120%.
The bulls rushed back toward both stocks as the growth of generative artificial intelligence (AI) platforms highlighted the growth potential of their AI-oriented platforms. Should investors hop aboard the bullish bandwagon and buy either of these volatile stocks today?
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Palantir is growing at a slower but more profitable pace
Palantir provides data mining and analytics services for government agencies and large enterprise customers. It aggregates large amounts of information from disparate sources to spot trends and help its clients make data-driven decisions.
Palantir stands out from the competition because its software is already widely used by the U.S. military and law enforcement agencies. It believes it can leverage that battle-hardened reputation to expand across the commercial market.
Palantir's revenue rose 47% in 2020 and 41% in 2021, and the bulls cheered as it declared it could grow its annual revenue by at least 30% through 2025. But its revenue only rose 24% in 2022, and it anticipates just 16% growth in 2023.
The company blamed that slowdown on the lumpy timing of its government contracts as well as the macro headwinds for its enterprise customers. However, its year-over-year revenue growth accelerated again in the third quarter, and it expects that acceleration to continue in the fourth quarter as the robust growth of its U.S. commercial business offsets the slower growth of its overseas commercial and government businesses. It also expects the rollout of its new AI Platform -- which helps its clients build their own AI apps and analyze (audit) large language models -- to stabilize its long-term growth.
Palantir has also stayed profitable on a generally accepted accounting principles (GAAP) basis over the past four quarters as it reduced its stock-based compensation. Analysts expect its revenue and adjusted earnings per share (EPS) to rise 20% and 16%, respectively, in 2024 as the macro situation stabilizes, but it isn't cheap at 65 times forward earnings.
C3 still hasn't proven its business model is sustainable
C3 develops AI algorithms that can be plugged into a company's existing software to automate, accelerate, and optimize certain tasks. It also offers those algorithms as pre-built applications. It mainly serves large enterprise customers across the energy, industrial, and aerospace markets -- but it generates about 30% of its revenue from a joint venture with the energy giant Baker Hughes. That deal expires in fiscal 2025, and there's no guarantee it will be renewed.
C3's revenue only rose 17% in fiscal 2021 (which ended in April 2021) as the pandemic disrupted the energy and industrial sectors. Its revenue grew 38% in fiscal 2022 as pandemic pressures eased, but rose a mere 6% in fiscal 2023 as the macro headwinds drove companies to rein in their software spending on big cloud software upgrades.
As C3's growth cooled off, it pivoted from a subscription-based model to a usage-based one over the past year. It insists that change was necessary to gain more customers in a tough market, but it also reduced its revenue per customer. On the bright side, it expects its revenue to rise 11% to 20% in fiscal 2024 as the macro environment stabilizes. Analysts expect its revenue to rise 15% in fiscal 2024 and 20% in fiscal 2025 -- but its stock isn't a screaming bargain at 8 times next year's sales.
C3 originally aimed to turn profitable on a non-GAAP (adjusted) basis by the end of fiscal 2024, but it abandoned that goal in favor of ramping up its investments in new generative AI tools. That might seem like a forward-thinking strategy, but it also suggests the company is fearful of falling behind the curve as companies adopt more generative AI services.
The better buy: Palantir
I'm not a big fan of either of these stocks right now, especially when so many other high-quality tech stocks are still on sale. But if I had to pick one over the other, I'd definitely pick Palantir because its sales growth is more stable, it's firmly profitable on a GAAP basis, and it doesn't face alarming customer concentration issues like C3.
