Nvidia(NASDAQ: NVDA) and C3.ai(NYSE: AI) represent two very different ways to invest in the growth of the artificial intelligence (AI) market. Nvidia is the world's top supplier of data center GPUs for processing complex AI tasks, while C3.ai develops AI algorithms that can optimize, accelerate, and automate tasks for large organizations.
But over the past three years, Nvidia's stock rallied by 480% while C3's stock tumbled by nearly 50%. Nvidia dazzled the bulls with its accelerating sales of data center GPUs, but C3 lost its luster as sales growth cooled and the company racked up steep losses. So, will Nvidia continue to outperform C3 for the foreseeable future?
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A market leader vs. a niche underdog
Nvidia is the world's largest producer of discrete GPUs for PCs and servers. It once generated most of its revenue from gaming PCs, but the rapid expansion of the AI market turned its data center GPU unit into its largest and fastest-growing business. The company generated 87% of its revenue from data center chips in the latest quarter.
Nvidia controls 88% of the entire discrete GPU market, according to JPR, as well as 98% of the data center GPU market, according to TechInsights. That market dominance should help the company remain the linchpin of the AI market.
Nvidia's revenue growth flatlined in fiscal 2023 (which ended in January 2023) as the global PC market lapped its pandemic-driven acceleration. But in fiscal 2024, its revenue soared 126% as the market's demand for the company's AI chips outstripped available supply. Analysts expect Nvidia's revenue to rise another 98% in fiscal 2025.
C3.ai is a much smaller software company that plugs its AI algorithms into a company's existing infrastructure. It also provides those algorithms as stand-alone services.
C3.ai faces a lot of competition from data mining services like Palantir, automation platforms like UiPath, and integrated AI tools in big cloud infrastructure platforms like Amazon Web Services (AWS). C3.ai also relies on a single joint venture with the energy giant Baker Hughes for about 30% of its annual revenue -- and that crucial deal is set to expire next April.
C3.ai's revenue only rose 6% in fiscal 2023 (which ended in April 2023) as the macro headwinds drove many companies to rein in their software spending. Its new consumption-based pricing model, which is aimed at gaining more customers in a tough market, also cannibalized the company's subscription-based fees. But C3.ai's revenue grew 16% in fiscal 2024, and analysts expect an acceleration to 23% growth in fiscal 2025 as the macro environment warms up and it rolls out more generative AI tools.
Based on those estimates, Nvidia doesn't look cheap at 23 times this year's sales. C3.ai looks a bit cheaper at 9 times this year's sales -- but it isn't a screaming bargain yet.
But which company is more profitable?
Nvidia is consistently profitable on a generally accepted accounting principles (GAAP) basis, but C3.ai continues to rack up steep GAAP and non-GAAP losses. C3.ai originally aimed to turn profitable on a non-GAAP basis in fiscal 2024, but it walked back those plans in the first quarter of that year to ramp up its R&D and marketing investments in new generative AI tools.
On a non-GAAP basis, analysts expect Nvidia's EPS to jump 109% in fiscal 2025. However, they expect C3.ai's non-GAAP net loss to widen this year as it ramps up its AI investments.
Nvidia trades at 43 times forward earnings, which seems reasonable relative to its near-term growth rates. Its main competitor, AMD, which is growing at a much slower rate, only has a slightly lower forward multiple of 41.
Lastly, we should note that C3.ai's share count rose more than 20% over the past three years as it subsidized its salaries with a lot of stock-based compensation. Nvidia's share count actually declined 1% during that period as it accelerated stock buybacks.
The better buy: Nvidia
It's easy to see why Nvidia outperformed C3.ai; it's larger, it's growing faster, it's more profitable, and it has a much wider moat. Those strengths should drive its stock higher and help it outperform C3.ai for the foreseeable future. C3.ai isn't down for the count yet, but it needs to narrow its losses, diversify its customer base, and prove its business model is sustainable.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Nvidia, Palantir Technologies, and UiPath. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
