When it comes to artificial intelligence (AI), odds are you think about "Magnificent Seven" stocks such as Microsoft, Nvidia, or Tesla simply by default. But in 2024, one smaller player emerged from the deepest corners of the AI realm and propelled itself into the spotlight. Enterprise software darling Palantir Technologies had a year for the record books in 2024. The shares soared by about 350% last year, making Palantir the No. 1 gainer among stocks in the S&P 500 (^GSPC 1.26%).
Given such an epic run, it's natural for investors to be turning over every stone to try and find the next Palantir. I'll explore one of Palantir's chief competitors, a smaller AI software business known as C3.ai (AI 6.09%). Could C3.ai be the Palantir of 2025?
Looking at C3.ai's business trends
Enterprise software is a highly competitive industry. One way that smaller businesses can make headway in software sales is by partnering with larger industry incumbents. During C3.ai's second quarter of fiscal 2025 (ended Oct. 31), the company closed more than 60% of its deals through this partner ecosystem.
Some of C3.ai's strategic relationships include cloud hyperscalers such as Microsoft, Amazon, and Alphabet. Moreover, the company also has alliances with consulting firms Booz Allen Hamilton and Capgemini.
Working with a broad array of big tech firms and specialized consulting agencies has helped C3.ai broaden its end markets. According to the company's latest financial results, nearly half of new bookings came from aerospace and defense contractors, while almost another 30% of deals focus on areas including manufacturing, energy and utilities, and life sciences.
In the table, I've broken down C3.ai's annual revenue growth rate during the past several quarters:
| Category | Q1 Fiscal 2024 | Q2 Fiscal 2024 | Q3 Fiscal 2024 | Q4 Fiscal 2024 | Q1 Fiscal 2025 | Q2 Fiscal 2025 |
|---|---|---|---|---|---|---|
| Revenue growth rate % year over year | 11% | 17% | 18% | 20% | 21% | 29% |
Data source: C3.ai investor relations.
In slightly more than one year's time, C3.ai has nearly tripled its revenue growth rate. That alone is worth a nod of approval; however, what is even more impressive is C3.ai's top line now is growing at about the same rate as Palantir's.
With that in mind, I bet you'd think C3.ai stock is skyrocketing. Well, guess again.
Image source: Getty Images.
C3.ai's valuation is compelling compared to its peers
The chart illustrates the price-to-sales (P/S) ratio for both Palantir and C3.ai.
AI PS Ratio data by YCharts
It's pretty easy to spot the outlier above. The ongoing valuation expansion in Palantir stock has caused a nearly sixfold disparity between itself and C3.ai.
To be fair, Palantir generates positive net income, whereas C3.ai is still a cash-burning operation. Nevertheless, these figures are all relative -- Palantir's profits are still quite small, as evidenced by the company's price-to-earnings (P/E) ratio of 378. In other words, despite its profitability, Palantir is much more richly valued using the P/S ratio as opposed to an earnings-based valuation methodology.
Is C3.ai stock a buy in 2025?
Although Palantir has become a favorite among AI investors, there is another side to the company's pricey valuation. Expectations surrounding Palantir are now sky-high, and management is facing extraordinary levels of execution risk from investors. If Palantir's growth train shows one hiccup, shares could see a precipitous decline.
By contrast, C3.ai appears to be in the early stages of hitting its stride. Revenue is consistently accelerating, net losses are shrinking, and the company's partnership model seems to be paying off big time.
Nevertheless, I don't think C3.ai shares will really kick into a new gear unless and until the company starts generating profits. Based on management's projections and available industry research, consistent profits look like they are a couple of years away at the earliest.
I think C3.ai stock does carry some upside in the near term, but I see an investment in the company as somewhat speculative. I think a position in C3.ai is warranted for investors with higher tolerance for risk, and those willing to hold on to their position for a few years, at least.
Moreover, I would encourage investors to consider only a small position in C3.ai for the time being. Although the company has some momentum, there is still a lot that needs to go right before C3.ai could be considered a rock-solid opportunity.
