Palantir vs. C3.ai: 2 high-flying AI plays, no winning plays

introduction

AI has emerged as the hot investment theme of 2023, and big tech companies (FNGS) have enjoyed stellar runs in the first half of this year amid a wave of tech investor optimism sector. On the large market (spx extension)(QQQ) [index level], the “Magnificent Seven” (big tech stocks) have had a huge impact due to their huge market capitalizations. And it is there that all the attention of the media has been concentrated for several months now. However, several AI/AI-related growth stocks such as Palantir (NYSE: PLTR) and C3.ai (NYSE: AI) are enjoying a staggering recovery in 2023 after an epic slump last year.

While it’s difficult to separate the wheat from the chaff in the early stages of any technological transformation, we’ll be running a comparative analysis on Palantir and C3.ai in this note to decipher the best shares to buy right now. Let’s dive right in!

Palantir vs. C3.ai: Which stock is the best buy?

In this exercise, we will compare PLTR and AI stocks using fundamental, quantitative, technical and valuation analysis. Before we begin our comparative analysis, let’s briefly review each activity.

As you may know, Palantir helps government organizations and private sector enterprises build and deploy custom software applications/data operating systems that power AI-assisted (data-driven) decision-making from war zones to factories. And Palantir does this through its various AI-ready platforms: Gotham [government]Foundry [commercial], Apollo and AIP (artificial intelligence platform). To learn more about Palantir, refer to my past coverage of PLTR.

On the other hand, C3.ai helps organizations develop and deploy enterprise-scale AI applications through its Enterprise AI Application Development Platform, which includes developer tools [C3 AI Studio and C3 AI Ex Machina] and a big one [40+] and a growing library of turnkey business AI applications addressing use cases across industries as diverse as energy, manufacturing, healthcare, and finance.

If you want to know more about the platform of C3.ai, feel free to refer to the company’s website.

Both Palantir and C3.ai help organizations develop and implement AI software solutions by leveraging AI/ML technologies to enable advanced data analytics, pattern recognition, and predictive capabilities, albeit in different domains. While Palantir’s expertise lies in data integration, analytics, and intelligence applications, C3.ai’s strength lies in enterprise AI software, predictive analytics, and prebuilt AI models for industry-specific solutions.

As a starting point for this comparison, keep in mind that Palantir is approximately 7.6 times larger than C3.ai by market cap.

In the wake of severe macroeconomic challenges and some idiosyncratic issues, both Palantir and C3.ai have experienced significant slowdowns in growth in recent quarters. For Palantir, a slowdown in its government segment hurt total revenue growth. On the other hand, C3.ai’s growth has plateaued mainly due to its move to a usage-based pricing model. At the time of writing, both companies are expected to grow approximately 15% in the current fiscal year; however, Palantir operates on a much larger scale.

Both Palantir and C3.ai are well capitalized companies with no debt. However, margin trends for Palantir are far superior to C3.ai.

Over the past two years, Palantir has exhibited tremendous margin expansion, with gross margin rising from ~64% to ~79%. On the flip side, C3.ai’s gross margin deteriorated from ~76% to ~68%. As these companies expand, Palantir offers operating leverage, but C3.ai does not!

As you can see in the chart below, C3.ai is a loss-making business that burns cash, while Palantir generates massive free cash flow. Additionally, Palantir is making GAAP profitable (as evidenced by recent quarterly reports).

From a fundamental point of view, Palantir is a company headed in the right direction, while C3.ai seems obscure.

Despite the clear gap in their respective financial performance, Palantir and C3.ai are currently trading at similar P/S multiples of ~16-18x. As you may have noticed, most of the year-to-date gains in AI and PLTR stocks have been driven by an expansion in multiple trading.

While such high trading multiples are highly questionable [and excessive] in relation to the growth trajectories of these companies, that’s a discussion for another day. For now, we only agree that given stronger company fundamentals and similar trading multiples, Palantir is a better buy than C3.ai on a relative valuation basis.

Now, let’s look at the absolute rating of PLTR and AI.

• TQI rating for Palantir

• TQI assessment for C3.ai

Summary of TQI assessment for Palantir and C3.ai:

	Current share price	Estimate of the fair value of TQI	TQI’s 5-year price target	Return CAGR expected from TQI
Palantir	$16.59	$13.00	$20.70	+4.52%
C3.ai	$40.22	$18.77	$36.46	-1.94%

Click to enlarge

From a valuation standpoint, both Palantir and C3.ai are overrated. While the PLTR stock is down -21% from fair value, the AI ​​stock is down -53%. With both Palantir and C3.ai’s 5-year projected returns below my minimum investment rate of 15%, I wouldn’t buy either of these AI stocks right now. However, if I had to pick one, I would prefer Palantir over C3.ai due to its lower downside risk and positive return potential.

• Quant Factor Grade and technical analysis

According to Seeking Alpha’s Quant Rating system, both Palantir and C3.ai are rated “Hold” with identical scores of 3.49/5.

However, Palantir’s quant factor ratings have improved significantly over the past six months, while C3.ai’s ratings have been somewhat mixed. Clearly, Palantir is the winner here as well.

Interestingly, both Palantir and C3.ai have an “A+” grade for “Momentum” (technical); and similar looking stock charts:

After an epic slump in 2021-22, AI and PLTR are up sharply this year. However, both of these stocks remain well below their all-time highs and technical momentum combined with the hopium AI can propel these stocks much higher despite each of them approaching or being in “overbought” territory (RSI>70 ). So, going into the open here could be a dangerous proposition.

Closing thoughts

Excluding its ticker symbol [AI], C3.ai has nothing in its favor over Palantir, which looks superior based on fundamentals, valuations and ranks of quantitative factors according to our benchmarking exercise. While Palantir is the better stock here than C3.ai, PLTR is also not a buy due to the unfavorable risk/reward ratio. If I had to buy one, I would choose Palantir.

While I don’t know if we’re in an AI bubble or not, don’t shorten either name (or any other single title, for that matter) as technical momentum and AI hops can take these titles to incredible heights in this environment. That said, both PLTR and AI are stocks to avoid at current levels.

Takeaway key: I rate both Palantir and C3.ai “Neutral/Evita” at current levels.

Thanks for reading and happy investing. Share your thoughts, concerns and/or questions in the comments section below.