Palantir Technologies(NASDAQ: PLTR) has seemingly become the market leader in developing and deploying artificial intelligence (AI) software in the real world. After working with government agencies in its earlier years, Palantir is thriving in the commercial sector, especially after launching its AIP platform for AI applications.
Its accelerating revenue growth and juicy profit margins have fueled tremendous investment returns of nearly 400% over the past year.
That's why pointing you to C3.ai(NYSE: AI), another AI software stock, instead might seem counterintuitive. However, it makes sense when you consider all aspects of an investment, including the price you pay.
Here is why C3.ai is poised to outperform Palantir stock in 2025.
Palantir's excellence doesn't offset a ridiculous price tag
I'm not here to argue against Palantir's fundamentals. It's a fantastic business that's gaining momentum on AI tailwinds. Revenue growth is accelerating as enterprises flock to Palantir's AIP platform. The company's U.S. commercial customer count grew an impressive 77% year over year in Q3 to 321. Palantir's software has a remarkable range, from assisting in military missions to running hospitals. The roughly 20,000 large businesses in the U.S. alone represent a tremendous market opportunity.
Additionally, Palantir is growing profitably, evidenced by its consistently increasing Rule of 40 score. The Rule of 40 adds a company's percentage revenue growth to its free cash flow margin rate. Anything 40 or above is considered good, so Palantir's 68% in Q3 is stellar.
But a company and its stock aren't the same. Palantir's stock has soared to bubble-like valuations by almost any metric. Its price-to-sales (P/S) ratio is over 74, and its forward price-to-earnings (P/E) ratio is over 216 today (its trailing P/E is 411). The business grew revenue by 30% year over year in Q3. Meanwhile, analysts estimate that Palantir will grow earnings by an average of 28% annually over the long term.
These growth rates don't come close to justifying Palantir's current valuation, meaning the stock likely reflects at least several years of future growth. Buying at these levels will probably produce subpar results until the stock's valuation makes more sense.
C3.ai is growing on AI tailwinds but falls short in key areas.
No, C3.ai isn't on Palantir's level. The company is a direct competitor to Palantir. It also offers AI software applications to government agencies and enterprises for various applications. Interestingly enough, C3.ai is enjoying similar AI tailwinds and following a growth trajectory like Palantir's. Revenue grew by almost 29% in C3.ai's latest quarter, close to Palantir's:
Where C3.ai falls short is the company's bottom line.
Palantir is wonderfully profitable, generating $980 million in free cash flow over the past year on $2.6 billion in revenue (36% of revenue). The company is also consistently GAAP profitable and was added to the S&P 500 earlier this year. Meanwhile, C3.ai has burned over $58 million in cash over the past four quarters on $346 million in revenue. Even worse, its $274 million in trailing-12-month GAAP net losses are a gulf the business must close on, thanks mainly to high stock-based compensation amounting to nearly two-thirds of its revenue.
C3.ai over Palantir? Why it's possible in 2025.
Still, I like C3.ai over Palantir in 2025, despite its flaws. Why? Because it trades at a fraction of the valuation:
Two similar companies are growing at comparable rates. Does profitability alone justify one trading at nearly five times the valuation of the other? More importantly, C3.ai's financials are improving. The company's cash burn bottomed out at over $200 million in early 2023 and has improved to just over $58 million over the past four quarters.
Additionally, C3.ai has a healthy balance sheet with $730 million and zero debt. If the business generates cash flow in 2025 and shrinks its net losses, the market could recognize the improvement and reward C3.ai with a higher valuation. Still, even if the valuation remains unchanged, growing 30% will likely translate to solid investment returns.
On the other hand, Palantir's stock price could fall if its steep valuation begins to crack due to disappointing earnings or shakiness in the broader market. Palantir is the better business and preferred stock when the valuation makes sense. But while Palantir trades on cloud nine, C3.ai is a sneaky contrarian stock idea for 2025 and is likely the better short-term pick.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
