Palantir and C3.ai are emerging artificial intelligence (AI) software development companies.
Two names that have emerged alongside the big tech companies in the artificial intelligence (AI) space are enterprise software companies Palantir Technologies ( PLTR -2.93% ) and C3.ai ( AI -0.69% ).
While each company has made impressive advances in the AI market, I believe one of them represents a better long-term investment.
Let's take a closer look at Palantir and C3.ai and explore what they each have to offer.
1. Palantir: Pros and Cons
Palantir sells data analysis software to the private sector as well as to the U.S. government and its Western allies.
In the 12 months ending June 30, Palantir boasted 593 total customers, up 41% year over year. This has helped the company's revenue acceleration, but I think the unit economics of the business as a whole are more important.
For the quarter ended June 30, Palantir's operating income was $105 million, roughly 10 times higher than what it was in the second quarter of 2023. The combination of growing revenue and a disciplined cost structure has given Palantir impressive levels of profitability that it can reinvest in the business.
One thing I would note about investing in Palantir is the valuation. Palantir's market cap is around $70 billion, which is pretty high for a company that generated $2.5 billion in the past 12 months.
PLTR Price vs Free Cash Flow data from YCharts
Palantir stock isn't cheap, with a price-to-free cash flow (P/FCF) ratio of 109. Moreover, the chart above clearly shows that Palantir's valuation has expanded considerably through 2024.
This move may make Palantir less attractive to some investors, but before we make a firm decision on which company is the better option, let's take a look at C3.ai.
Image source: Getty Images.
2. Pros and Cons of C3.ai
C3.ai sells software to a variety of end markets, including energy, manufacturing, defense, financial services, and healthcare. Additionally, the company has a strong partner network with major cloud providers and consulting firms, including Amazon, Alphabet, Microsoft, Accenture, and Booz Allen Hamilton.
C3.ai reported revenue for the fiscal year that ended April 30 at the end of May.
In the 12 months ending April 30, C3.ai generated revenue of $310 million. That's a respectable 16% growth rate over the previous year, but there are some shortcomings to C3.ai's business.
The company's gross profit was roughly flat year-over-year, but its operating loss and net loss actually increased slightly.
AI Operating Profit (TTM) Data by YCharts
The financial picture suggests that C3.ai is paying a heavy price for growth. In the long term, funding unprofitable growth is not sustainable. Because of this, C3.ai may eventually face a liquidity crisis, which could have a negative impact on its business.
Conclusion
Picking the right growth stocks can be tricky. Software as a service (SaaS) businesses in particular may get a lot of attention, but that doesn't necessarily translate into a wise investment choice.
To me, investing in C3.ai carries significantly more risk than Palantir. Palantir generates more revenue in a quarter than C3.ai generates in a year. Additionally, Palantir has consistently expanded its business in a profitable manner, while C3.ai continues to hemorrhage cash.
Despite the high price tag, an investment in Palantir may be justified at this point. The long-term outlook for AI remains bullish, and Palantir's prospects are bright given its unique position between the private and public sectors. C3.ai, on the other hand, has not proven it can disrupt its peers and erode their market positions.
For these reasons, I believe Palantir is a better investment choice than C3.ai, and I believe long-term investors stand to be greatly rewarded if they are patient.
A good way to invest in stocks like Palantir is through dollar-cost averaging. This strategy allows you to invest in Palantir at different price points over time, helping to mitigate risk. Investors looking for exposure to emerging AI opportunities may want to consider a position in Palantir now.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Spatacco owns shares of Alphabet, Amazon, Microsoft, and Palantir Technologies. The Motley Fool owns shares of and recommends Accenture Plc, Alphabet, Amazon, Microsoft, and Palantir Technologies. The Motley Fool recommends Booz Allen Hamilton and C3.ai and recommends the following: long January 2025 $290 calls on Accenture Plc, long January 2026 $395 calls on Microsoft, short January 2025 $310 calls on Accenture Plc, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
