In addition to the major technology companies, two names have emerged in the field of artificial intelligence (AI): enterprise software companies Palantir Technologies (PLTR -2.93%) And C3.ai (AI -0.69%).

While each of the companies has done an impressive job of penetrating the AI ​​market, I believe one of them is the better long-term investment.

Let’s analyze the pros and cons of Palantir and C3.ai and find out what both have to offer.

1. The arguments for and against Palantir

Palantir sells data analysis software to the private sector as well as to the U.S. government and its Western allies.

For the 12 months ending June 30, Palantir added 593 customers, a 41% increase from the previous year. While this has helped the company increase its revenue, I think the unit cost of the entire company is more important.

For the quarter ended June 30, Palantir’s operating income was $105 million, roughly a tenfold increase from the second quarter of 2023. The combination of rising revenues and a disciplined cost structure has helped Palantir achieve impressive profitability, which the company can reinvest in the business.

My only caution when it comes to investing in Palantir is its valuation. Palantir’s market cap is around $70 billion – quite a lot for a company that generated $2.5 billion in the last 12 months.

PLTR Price to Free Cash Flow data by YCharts

With a price-to-free cash flow (P/FCF) ratio of 109, Palantir stock is anything but cheap. Moreover, the chart above clearly shows that Palantir’s valuation has increased significantly in 2024.

While this dynamic might make Palantir unattractive to some investors, let’s take a look at C3.ai before making a final decision on which company might be the better option.

Image source: Getty Images.

2. The arguments for and against C3.ai

C3.ai sells software to many different end markets, including energy, manufacturing, defense, financial services, and healthcare. In addition, the company has an extensive partner network with major cloud providers and consulting firms such as Amazon, alphabet, Microsoft, AccentureAnd Booz Allen Hamilton.

At the end of May, C3.ai announced earnings for the fiscal year ended April 30.

For the 12 months ended April 30, C3.ai generated revenue of $310 million. While this represents a notable 16% year-over-year growth, C3.ai’s business also has some weaknesses.

The company’s gross profit remained essentially unchanged compared to the previous year, while operating losses and net loss even increased slightly.

AI Total Operating Profit (TTM) data from YCharts

This financial picture implies that C3.ai is paying a high price for its growth. It is not sustainable in the long run to finance unprofitable growth. For this reason, C3.ai could face a liquidity crisis at some point, which could have a detrimental impact on the business.

The conclusion

Navigating growth stocks can be tricky. Software-as-a-service (SaaS) companies in particular can be a beacon of attention—but that doesn’t always translate into a prudent investment decision.

In my opinion, investing in C3.ai simply carries an outsized risk compared to Palantir. Palantir generates more revenue in a quarter than C3.ai does in an entire year. Moreover, Palantir is growing steadily and profitably while C3.ai continues to lose money.

Despite the high price, investing in Palantir might be justified right now. The long-term outlook for AI remains optimistic, and given Palantir’s unique position between the private and public sectors, the company’s prospects are bright. On the other hand, C3.ai has yet to prove that it can disrupt its competitors and break into their market position.

For these reasons, I believe Palantir is a better investment opportunity than C3.ai and I am convinced that long-term investors will be generously rewarded if they show some patience.

A good approach to investing in a stock like Palantir is to use dollar-cost averaging. This strategy allows you to invest in Palantir at different prices over time, which helps mitigate risk. Investors looking to get exposure to new AI opportunities should consider taking a position in Palantir now.