Investors Are Piling Into Palantir, but Its AI Competitor Might Outperform It in 2025

Core Insights - Palantir is experiencing profitable growth, highlighted by a Rule of 40 score of 68% in Q3, indicating strong revenue growth and free cash flow margin [1] - Despite Palantir's strong fundamentals, its current stock valuation appears inflated, suggesting potential subpar investment returns in the near term [2][11] - C3.ai, a direct competitor to Palantir, is also growing rapidly, with a revenue increase of 29% in its latest quarter, comparable to Palantir's growth [3][4] Company Performance - Palantir's revenue grew by 30% year over year in Q3, with a significant increase in U.S. commercial customers, which rose by 77% to 321 [10][11] - C3.ai's operating revenue growth was reported at 28.83%, indicating a competitive growth trajectory [4] - Palantir generated $980 million in free cash flow over the past year, representing 36% of its $2.6 billion revenue, and is consistently GAAP profitable [14] Valuation Comparison - Palantir's price-to-sales (P/S) ratio exceeds 74, and its forward price-to-earnings (P/E) ratio is over 216, suggesting a bubble-like valuation [11] - C3.ai trades at a significantly lower valuation compared to Palantir, despite both companies experiencing similar growth rates [5][6] - C3.ai has a healthy balance sheet with $730 million in cash and no debt, which could lead to improved market recognition if it generates cash flow and reduces net losses [15] Market Outlook - While Palantir is currently viewed as a leading AI software company, its high valuation may lead to a decline in stock price if earnings disappoint or market conditions worsen [16][17] - C3.ai is positioned as a contrarian investment opportunity for 2025, potentially outperforming Palantir in the short term due to its lower valuation and improving financials [16][19]