Shares of Palantir Technologies (PLTR -0.53%) rose an impressive 30% on February 6 after the company reported solid fourth-quarter 2023 results the day before, driven by growing demand for its artificial intelligence (AI) software solutions.
However, Palantir wasn’t the only company whose shares rose after the quarterly report. The strong results had a positive impact on the pure-play enterprise AI software provider C3.ai (AI 6.07%), whose shares rose almost 8% on the same day. C3.ai stock may have surged following Palantir’s results on strong demand for AI software.
Palantir closed an impressive 103 deals in the most recent quarter, each valued at more than $1 million – a doubling from the same period last year – and noted that the launch of its artificial intelligence platform (AIP) was “boosting both conversion of new and existing customers.” Customer extensions.”
Additionally, Palantir’s commercial customer count increased 44% year-over-year in its most recent quarter, resulting in a 32% increase in commercial revenue to $284 million. There’s no doubt that these metrics from Palantir actually paint a healthy picture of the AI software market. But can C3.ai capitalize on this opportunity and generate healthy profits like its larger competitor? Let’s find out.
C3.ai is not Palantir, but it has plenty of room to grow
Palantir made a name for itself by developing and providing AI software platforms to intelligence agencies in the US to support them in counterterrorism operations.
And now the company’s commercial business has gained solid momentum. The hundreds of bootcamps Palantir organized last year helped commercial customers understand how to integrate AI into their operations, allowing the company to acquire new customer accounts and win more business from existing customers.
C3.ai, on the other hand, also provides companies with a software platform that allows them to create and deploy AI applications. So C3.ai and Palantir are targeting a similar market, but the latter appears to have a head start in this market due to its long history of providing AI solutions to government agencies.
This is evident from the fact that Palantir’s fourth-quarter commercial revenue of $284 million is equal to the total revenue generated by C3.ai over the past 12 months. Additionally, Palantir ended 2023 with revenue of $2.23 billion, while C3.ai’s revenue is expected to be $306 million in the current fiscal year.
So C3.ai still has a long way to go before it can catch up with Palantir, which was ranked as the top AI software platform provider in 2021 by market research firm IDC. The good news for investors, however, is the enormous addressable opportunity in the enterprise AI market, which is expected to see 52% annual growth through 2029 and generate $204 billion in annual revenue by the end of the forecast period, according to Mordor Intelligence.
Therefore, there is a lot of room for C3.ai to grow in this market in the long term. The company’s growth is expected to accelerate in the coming years thanks to a shift in its business model.
Possible growth acceleration is imminent
Shares of C3.ai have fallen 44% since hitting a 52-week high in mid-June last year. This is because the company’s growth has slowed in recent quarters due to a change in the business model. C3.ai switched to a pay-as-you-go business model about a year and a half ago. The company previously followed a subscription-based model, which gave it revenue visibility as C3.ai was able to lock customers into long-term contracts.
However, the move means customers will pay for C3.ai’s enterprise AI software offerings when they use them. The company took this step to make it easier for customers to sign up for its solutions and avoid lengthy negotiations. However, C3.ai management noted that the transition will initially squeeze margins and flatten revenue growth.
This explains why C3.ai’s fiscal 2023 revenue (which ended in April 2023) rose just 5.6% year-over-year to $267 million. The good thing is that C3.ai is almost at the end of the second phase of its business model transition, where it is seeing improvement in business activity and customer spending. For the next phase, which is expected to begin in a few quarters, C3.ai forecasts a significant increase in revenue growth as well as an improvement in its margin profile.
This explains why the company expects to close fiscal 2024 with revenue of $295 million to $320 million. At the midpoint, this would represent 15% year-over-year growth. Even better, analysts expect growth to accelerate in the next few years.
It’s also worth noting that analysts expect C3.ai’s profits to grow at an impressive 50% annual rate over the next five years. For comparison, Palantir is forecast to grow 85% in annual earnings over the next five years. However, Palantir stock’s 163% rise over the past year means investors will have to pay a sizable valuation to buy now.
Palantir currently has a price-to-sales ratio of 22.6, which is more than double C3.ai’s sales multiple of 10.5. It’s also worth noting that Palantir’s revenue is expected to grow by 20% in 2024 and 2025, while the previous chart shows that C3.ai’s revenue will also grow at a similar rate from the new fiscal year, which will begin in May Dimensions could rise in 2024.
All of this suggests that C3.ai could prove to be a solid alternative for investors looking to buy an AI software stock right now, especially considering that Palantir’s meteoric rise has driven up the company’s valuation .