Since OpenAI's ChatGPT burst onto the scene in late 2022, generative artificial intelligence (AI) has taken Wall Street by storm -- convincing companies to pivot their business models to take advantage of the new tech. Data analytics firms Palantir Technologies (PLTR 1.88%) and C3.ai (AI -0.83%) are two great examples of this phenomenon.
That said, not everyone is impressed by these stocks. In fact, some Wall Street analysts suggest it might be time for investors to sell. Let's dig deeper into the pros and cons of investing in both AI companies.
1. Palantir Technologies
Palantir is a software-as-a-service (SaaS) company that helps public and private sector clients analyze internal data, identify actionable trends, and boost efficiency. It quickly adopted generative AI's large language models (LLMs) to make this process even faster and more sophisticated. That said, with shares up by an eyewatering 1,600% over the last three years, the company may have become the victim of its own success.
Overall, analysts have turned bearish on the stock with a consensus price target of $101, which would imply a downside of 28%. But that might not be going far enough. In March, Brent Thill from Jeffries reaffirmed his sell rating on Palantir with a price target of $60, implying a drop of 57% from the stock's price at the time of this writing. He cites the company's sky-high valuation.
It's easy to see why Thill is concerned about Palantir's price tag. With a price-to-earnings (P/E) multiple of 609, company shares are extremely expensive compared to the Nasdaq average of 31. To be fair, the business is growing fast -- with first-quarter earnings up by over 100% year over year to $217.7 million. However, Palantir's stock price is so high that it may already price in many years of triple-digit growth. And there could be a correction if it doesn't meet these lofty expectations.
2. C3.ai
C3.ai is a tech company that quickly incorporated generative AI's LLMs into its business model to help enterprise clients manage and analyze operational data. However, unlike Palantir, analysts remain optimistic, with a consensus price target of $29 -- implying an upside of around 21% from the stock's price at the time of this writing. But not everyone on Wall Street agrees.
Morgan Stanley's Sanjit Singh gives the stock an underweight rating with a price target of $22, implying a decline of 8% from the current price. While the analyst acknowledges C3.ai's respectable growth rate (fourth-quarter sales jumped 26% year over year to $108.7 million), he highlights its unprofitability, which could undermine long-term returns.
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C3.ai's fourth-quarter operating losses jumped 8% to $89 million, due mainly to significant spending on marketing and research and development (R&D). Cutting back these outflows could cause revenue growth to stall, so the company is in a bit of a catch-22 with no clear pathway to profitability. Furthermore, the losses are substantial -- standing at a whopping 81% of revenue.
The good news is that with a cash balance of $742.7 million, C3.ai can sustain these losses for several more quarters. Still, investors will eventually have to start worrying about equity dilution (creating and selling more shares) as management looks for external sources of capital.
With a price-to-sales (P/S) ratio of 8, C3.ai's stock also looks extremely expensive for a company with decent but not exceptional growth and huge losses. For context, the Nasdaq has an average P/S of 6.4. And C3.ai's stock should probably trade at a discount because of its deeply cash-burning business model and no clear path to profits.
