The demand for artificial intelligence (AI) software is expected to increase noticeably in the long term as organizations and governments around the world adopt this technology for various applications. Not surprisingly, S&P Global Market Intelligence expects the size of the generative AI software market to grow 58% annually through 2028, generating $52 billion in annual revenue.
Palantir Technologies (NYSE:PLTR) And C3.ai (NYSE: AI) are two companies that allow investors to capitalize on the fast-growing AI software market. However, it’s worth noting that both stocks have enjoyed varying fortunes in the market over the past year. While Palantir shares have posted an impressive 54% gain, C3.ai stock is down 15% over the past year.
Does this mean Palantir is the better AI bet of the two? Or will C3.ai’s fortunes start to turn after its latest quarterly report? Let’s find out.
The case for Palantir Technologies
Palantir is best known for providing software platforms to intelligence communities and federal agencies for counter-terrorism operations and is now starting to make good progress in the commercial AI software market. In the first quarter of 2024, Palantir’s total revenue rose 21% year over year to $634 million. The company’s government revenues rose 16% year-over-year to $335 million, while commercial revenues rose faster by 27% to $299 million.
Increasing adoption of Palantir’s AI software platform by commercial customers was a key reason why commercial revenues grew faster. Palantir has built a solid go-to-market strategy by conducting “bootcamps,” helping customers understand how to leverage AI specific to their use case. During its May earnings conference call, Palantir management pointed out that the company has hosted boot camps with 915 organizations, and that this outreach is helping the company win more customers.
According to Palantir:
Case in point: a leading utility signed a seven-figure deal just five days after completing boot camp. Another client immediately signed a paid deal after just one day of their multi-day bootcamp and converted it into a seven-figure deal three weeks later. We expect favorable economic conditions and higher throughput to continue to accelerate our operations.
This explains why Palantir is witnessing a remarkable increase in bookings from commercial clients. Last quarter, Palantir booked commercial contracts with a total contract value (TCV) of $505 million. That was a huge increase of 187% compared to the previous year. This impressive increase in Palantir’s commercial activity is why residual deal value (RDV), the total remaining value of contracts at the end of the reporting period, increased 22% year over year to $4.1 billion.
That was slightly higher than Palantir’s quarterly revenue increase. Furthermore, the size of Palantir’s RDV suggests that it is building a solid revenue pipeline, which could help the company maintain a healthy growth rate over the long term. This is likely one reason why analysts predict that the company’s earnings will achieve a compound annual growth rate (CAGR) of 85% over the next five years, indicating that Palantir could remain a top AI stock for a long time to come.
The case for C3.ai
C3.ai is another AI software play that has been witnessing an acceleration in growth lately, mainly due to a change in business model where customers pay for their services on a consumption basis rather than entering into long-term subscription contracts. In the fourth quarter of fiscal 2024 (which ended April 30), C3.ai’s revenue rose 20% year over year to $86.6 million. Annual revenue rose 16% to $311 million.
What’s worth noting here is that C3.ai’s revenue growth has accelerated over the past five consecutive quarters thanks to growing interest in its AI software offering. Management points out that its enterprise AI programs are deployed across 19 industries, and more importantly, C3.ai’s government-related business more than doubled in the past fiscal year.
This improving momentum explains why the company’s revenue growth will accelerate in the current fiscal year. Moreover, analysts have increased their forecasts for the coming years, as shown in the following chart.
C3.ai’s improving growth is made possible by an increase in the number of deals the company is closing due to its pay-as-you-go model. In fiscal 2024, it closed 191 customer agreements, a 52% increase from the previous year. Additionally, C3.ai ended the year with 123 pilots, up 151% from fiscal 2023. This robust improvement in pilots could help C3.ai improve its future revenue pipeline if it is successful in closing those deals.
Thanks to these catalysts, analysts expect C3.ai to maintain healthy earnings growth of 50% over the next five years, indicating that it has the potential to be an AI winner in the long term. The good part is that Wall Street has started realizing C3.ai’s AI potential and the stock has risen impressively after the latest report.
The verdict
Both companies are making good progress in the AI software market. However, C3.ai is much cheaper with a price-to-sales ratio of 11.5 compared to Palantir’s sales multiple of 23. Considering that both companies are showing nearly identical growth, investors looking for a value play between these two AI shares likely to choose C3.ai.
But at the same time, investors with a higher risk appetite may want to consider buying Palantir as well, as it is the larger company of the two and has already built a solid revenue pipeline that could accelerate growth in the future. As the discussion above shows, Palantir’s earnings are expected to grow at a much faster pace over the next five years.
So investors looking to add an AI software stock to their portfolio have two solid options in front of them, and they can make their choice depending on their risk profile and the valuation they’re comfortable with.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
Better Artificial Intelligence Stock: Palantir Technologies vs. C3.ai was originally published by The Motley Fool
