Investors are accumulating shares in Palantir, yet its AI rival may surpass its performance by 2025.
Palantir Technologies (PLTR dropping by 3.72%) has become a frontrunner in bringing artificial intelligence (AI) into real-world applications. After collaborating with government agencies during its initial years, Palantir has seen significant success in the commercial sector, particularly following the launch of its AIP platform for AI applications.
Its surging revenue and impressive profit margins have led to investment gains of approximately 400% over the past year.
However, considering another AI software stock like C3.ai (AI down by 4.26%), might seem puzzling. But upon closer examination, it makes sense, especially considering the cost.
Here's why C3.ai could outperform Palantir's stock by 2025.
Palantir's strengths don't compensate for its high price tag
I'm not here to criticize Palantir's fundamentals. It's a powerful business capitalizing on AI growth trends. Palantir's revenue growth is increasing rapidly as businesses are rapidly adopting its AIP platform. Palantir's U.S. commercial customer base expanded by a staggering 77% year over year in Q3 to 321 clients. Palantir's software has a wide range, catering to military missions and hospital administration. The U.S.'s 20,000 large businesses represent a significant market potential.
Moreover, Palantir's profitability is evident as its Rule of 40 score consistently rises, which adds a company's percentage revenue growth to its free cash flow margin rate. A score of 40 or above is considered positive, with Palantir's 68% in Q3 being exceptional.
However, a company and its stock are two different entities. Palantir's stock has experienced inflated valuations according to most metrics. Palantir's P/S ratio exceeds 74, and its forward P/E ratio is over 216 (its trailing P/E is 411). Although Palantir's revenue grew by 30% year over year in Q3, analysts predict Palantir will grow earnings by an average of 28% per year in the long term.
These growth rates do not justify Palantir's current valuation, indicating that investors may be anticipating several years of future growth. Purchasing stocks at these levels may result in subpar returns until the valuation becomes more reasonable.
C3.ai struggles but holds promise in crucial areas.
No, C3.ai does not compare to Palantir. C3.ai is also a competitor to Palantir, offering AI software applications for use by government agencies and businesses. Remarkably, C3.ai is experiencing similar AI growth trends to Palantir. Revenue grew by approximately 29% in C3.ai's latest quarter, comparable to Palantir's growth:
However, where C3.ai falters is its financial performance.
Palantir is impressively profitable, generating $980 million in free cash flow over the past year on $2.6 billion in revenue (36% of revenue). The company also consistently turns a GAAP profit and was added to the S&P 500 this year. In contrast, C3.ai has burned through $58 million in cash over the past four quarters on $346 million in revenue. To make matters worse, C3.ai boasts a net loss of $274 million in its trailing 12-month GAAP earnings, with a substantial portion attributed to high stock-based compensation, which accounts for nearly two-thirds of its revenue.
C3.ai vs. Palantir: The surprising 2025 choice
Despite C3.ai's limitations, I still prefer C3.ai to Palantir in 2025. Why? Because its valuation is significantly lower:
Two businesses are reporting growth at almost identical rates. Does profitability alone justify one stock trading at near five times the valuation of the other? More importantly, C3.ai's financials are improving. The company's cash burn decreased from over $200 million in early 2023 to just over $58 million over the past four quarters.
Furthermore, C3.ai maintains a robust balance sheet of $730 million with no debt. If C3.ai generates cash flow in 2025 and cuts its net losses, the market may recognize this improvement and increase C3.ai's valuation. However, even if the valuation remains unchanged, growth of 30% is likely to result in appealing investment returns.
On the other hand, Palantir's stock price may decline if its sky-high valuation begins to falter due to disappointing earnings or broader market instability. Palantir is the superior business, but as long as it trades at elevated prices, C3.ai presents an intriguing contrarian stock choice for 2025, making it a potential strong short-term pick.
Despite Palantir's impressive revenue growth and profitability, the high price tag associated with its stock could limit potential investment gains. With a P/S ratio exceeding 74 and a forward P/E ratio over 216, Palantir's current valuation may not justify its projected growth rates.
On the other hand, C3.ai's lower valuation presents a compelling contrarian stock choice. Even though it faces financial challenges, its lower valuation compared to Palantir, despite similar growth rates, makes it a potential strong short-term pick for investors seeking opportunities in the finance and investing realm.
