Oracle(NYSE: ORCL) and C3.ai(NYSE: AI) represent two very different ways to invest in the booming artificial intelligence (AI) market. Oracle is one of the world's largest database software providers, so it hosts a lot of the data that needs to be crunched by AI applications. Its cloud infrastructure platform also provides the computing power and storage to run many of those AI applications and other cloud-based applications. C3.ai is a smaller developer of AI algorithms which can be plugged into an organization's existing software to accelerate, automate, and optimize certain tasks.
C3.ai's founder and CEO Tom Siebel previously founded Siebel Systems, a sales automation software provider that Oracle acquired for $5.85 billion in 2006. Siebel founded C3.ai in 2009, and that new AI company went public in Dec. 2020.
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C3.ai is growing a lot faster than Oracle. But over the past three years, C3's stock declined about 50% and trades at a 45% discount to its IPO price. Oracle's stock rallied nearly 90% during the same period. Let's see why the blue-chip tech giant outperformed the high-growth newcomer -- and if it will remain the more attractive investment for the foreseeable future.
The differences between Oracle and C3.ai
Over the past decade, Oracle transformed a lot of its on-site database appliances and software into cloud-based services. It also expanded that cloud-based ecosystem with more enterprise resource planning (ERP) and cloud infrastructure services.
A lot of that growth was driven by dozens of acquisitions -- including the data broker Datalogix, the ERP leader NetSuite, the cloud-based constructing management company Aconex, and the healthcare IT giant Cerner. That expansion transformed Oracle into a more diversified cloud software company and reduced its dependence on its slower-growth on-premise services.
C3.ai has a much narrower focus. Over the years, the company was previously known as C3 Energy and C3 IoT (Internet of Things) before it shrewdly rebranded itself as C3.ai. But each interation of that company still peddled the same machine learning and AI algorithms, which can either be plugged into an organization's software or accessed as stand-alone modules.
C3.ai primarily serves large customers across the energy, industrial, financial, and government sectors. However, it generates more than 30% of its revenue from a joint venture with the energy giant Baker Hughes (NASDAQ: BKR). That crucial deal, which will expire by the end of fiscal 2025 (April 2025), hasn't been renewed yet.
Oracle is firmly profitable on a generally accepted accounting principles (GAAP) basis, but its non-GAAP earnings generally paint a clearer picture of its growth without the near-term noise from its acquisitions, investments, and stock-based compensation. C3.ai is still deeply unprofitable by both GAAP and non-GAAP measures.
Which company is growing faster?
From fiscal 2020 to fiscal 2024 (which ended this May), Oracle's revenue grew at a compound annual growth rate (CAGR) of 8% as its GAAP EPS increased at a CAGR of 5%.
Most of that growth was driven by the cloud-based software as a service (SaaS) and infrastructure as a service (IaaS) platforms which accounted for 42% of its top line in the first quarter of fiscal 2025. It expects its growth in IaaS revenue, which already surged 50% in fiscal 2024, to accelerate again in fiscal 2025 as the AI market expands. It also repurchased about 6% of its shares over the past four years.
From fiscal 2024 to fiscal 2027, analysts expect Oracle's revenue and GAAP EPS to grow at a CAGR of 12% and 21%, respectively. Its stock isn't exactly a bargain at 31 times next year's GAAP earnings, but it looks a bit more reasonably valued at 26 times its forward non-GAAP earnings. It also pays a forward dividend yield of nearly 1%.
C3 is growing a lot faster. From fiscal 2020 to 2024, its revenue grew at a CAGR of 19%. Analysts expect its revenue to climb at a CAGR of 20% from fiscal 2024 to 2027.
That top-line growth seems stable, but C3 expects to stay unprofitable for at least the next few years as it ramps up its spending on new generative AI tools. That means it won't prioritize buybacks or pay dividends anytime soon. It's also too heavily dependent on Baker Hughes, and it's been gradually cannibalizing its higher-value subscriptions with its lower usage-based fees to gain new customers. Its stock also doesn't look like a screaming bargain at six times next year's sales.
The obvious winner: Oracle
Oracle isn't a high-growth tech stock, but its broad diversification, stable profits, and reasonable valuation make it a much healthier investment than C3.
C3 isn't doomed yet, but it needs to renew its partnership with Baker Hughes, resolve those customer concentration issues, and meaningfully narrow its losses before it impresses the bulls again. C3 might have the catchier ticker symbol, but Oracle is definitely a more balanced play on the growing AI market.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
