Is C3.ai Stock a Buy Now?

The great thing about being a long-term investor is that it gives you time to change your mind when the facts demand it. C3.ai (NYSE: AI) didn't have the most impressive fundamental qualities a year or two ago, but the company has made strides to the point that it's time to give it its recognition as a potential stock investment.

There aren't many companies selling artificial intelligence (AI) application software to governments and enterprises, and while Palantir Technologies (NYSE: PLTR) has gotten most of the attention to date, C3.ai has become a stock to watch.

Here's why C3.ai has captured my attention and whether investors should consider buying the stock now.

The demand for AI technology is scorching hot

It's becoming increasingly clear that organizations want to wield AI technology. Palantir gets a lot of attention and has publicly touted how its Artificial Intelligence Platform (AIP) accelerated growth across its business segments. While smaller and less hyped, C3.ai is a competitor that offers a development platform and finished software for AI applications across various industries.

Palantir deserves credit for its success, but you could say that AI has been a rising tide, and it's lifting many boats:

PLTR Operating Revenue (Quarterly YoY Growth) data by YCharts

No, C3.ai isn't growing as fast as Palantir is. Still, the company has successfully righted itself after a tough stretch between 2022 and early 2023, including headwinds from rapidly rising interest rates and a shift in its billing model that depressed revenue growth.

Like Palantir, C3.ai deserves credit. Last quarter, the company generated 16% of its revenue from professional services, mostly fees customers pay to pull desired products and features through C3.ai's engineering pipeline. In other words, C3.ai's customers see enough value in this software to buy it and then pay more to get it faster.

That underlines both the demand for C3.ai's technology and its quality.

C3.ai's financials are rapidly improving, but there's work ahead

C3.ai's poor financials have been its biggest obstacle. After all, archrival Palantir is comfortably profitable according to generally accepted accounting principles (GAAP), while C3.ai's trailing-12-month GAAP loss is a staggering $278 million -- almost as much as its $325 million in revenue. The biggest culprit is stock-based compensation, which accounts for nearly $220 million of that hole.

The good news is that things could be looking up from here.

C3.ai's revenue growth is accelerating, while its expenses are decelerating. They are running in opposite directions, which is a good thing. Additionally, C3.ai has generated $26.1 million in free cash flow over the past two quarters. The company has a $762 million cash position and zero debt. This is a financially stable company, though its GAAP losses will likely continue weighing on the stock's valuation.

If management can contain or trim its stock-based compensation expenses and continue its current trends, C3.ai could make strides toward profitability.

Is C3.ai a buy? Adding context to help make a decision

So, growth is accelerating, and there's a realistic path to C3.ai considerably improving its financials. Are things headed in the right direction enough to make the stock a buy today?

I've concluded in the past that Palantir's superior financials give its stock an edge over C3.ai, but that's become a more challenging case to make. Palantir's valuation has gone to the moon, creating a gulf between C3.ai's and Palantir's valuations:

AI PS Ratio data by YCharts

Remarkably, Palantir's price-to-sales (P/S) ratio has exceeded even its peak during the stock market bubble in 2021. Palantir stock deserves a premium over C3.ai, but trading over 4 times the latter's valuation seems excessive, to put it mildly. Choosing between buying each stock at their respective prices today, I think C3.ai will outperform Palantir moving forward.

Sometimes, evaluating whether a stock is worth buying requires context. That's why I've included Palantir, arguably the closest company to C3.ai, in this discussion. I don't think C3.ai's fundamentals are as good as Palantir's, but the company seems to be headed in the right direction, an encouraging sign for long-term investors.

The company's improving fundamentals and dramatically more appealing price tag make the stock a buy today.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.