C3.ai (NYSE:AI) stock has seen a significant year-to-date return of 123%. Despite reaching $49 earlier this year, AI stock has corrected to around $26 per share at the time of writing, presenting a potential entry point. With a 39% short interest in the free float, a short-squeeze rally is anticipated by some speculators. That’s an intriguing story for this high-momentum AI play.

In Q1 2024, C3.ai posted $72.4 million in revenue, with subscriptions making up 85% of this total. The company secured 12 generative AI agreements for the quarter and has a pipeline of over 140 qualified C3 Generative AI opportunities, showing strong growth potential. Despite an anticipated operating loss for 2024, the stock may rebound as new deals boost subscription revenue. Expect a potential rally in the coming quarters.

Here’s why C3.ai could be an excellent long-term investment, but beware of the headwinds in the short term.

Recently on AI

In September, C3.ai expanded its partnership with Pantaleon by deploying C3 Generative AI for enhanced business efficiency, covering tasks from sugar cane harvesting to document management. They offer a comprehensive C3 Generative AI Suite with 28 domain-specific solutions, addressing security concerns related to large language models. This extends their success with clients. Such companies are Con Edison, Georgia-Pacific, and Nucor.

C3.ai’s partnership with Shell now monitors nearly 20,000 equipment pieces, saving over $2 billion yearly and avoiding expense disasters. The deal with Koch yields $4 million in monthly predictions and 5% improvements in equipment effectiveness at Georgia-Pacific. Two Generative AI projects are underway for streamlined data processing.

C3.ai Fundamentals

C3.ai’s recent financial performance has negatively impacted its stock. In its fiscal first quarter, the company reported $72.4 million in sales, meeting the high end of its guidance. While the loss per share improved from 12 to 9 cents year-over-year, the company recorded a negative free cash flow of $8.9 million. Subscription revenue constituted 85% of total revenue.

The profitability target for April 2024 was postponed due to higher generative AI investments. JPMorgan analyst Pinjalim Bora, neutral on the stock, finds the investment increase unjustified by top-line metrics. Despite a previous 180% gain, the stock has fallen recently.

There Are Other Profitable AI Companies

While C3.ai is often one of the top contenders in the artificial intelligence race, there are other contenders who offer stable profitability. A good example would be Palantir Technologies. Palantir initially served government clients with data analytics, expanding to civilian sectors. Their new AI platform, Palantir AIP, offers AI-driven recommendations and experiences strong demand. Evaluating both firms, which presents the better investment opportunity?

Without context, one might assume these firms are thriving due to AI, but recent data shows moderate growth. In the latest quarters (Palantir’s Q2 and C3.ai’s Q1), they grew at 13% and 11%, respectively. However, both forecasts accelerated growth for the next quarter, with Palantir at 16% and C3.ai at 19%.

Despite Palantir being a more mature firm with last quarter’s revenue at $533 million compared to C3.ai’s $72 million, their growth rates are similar. Palantir’s advantage lies in its diversification, whereas C3.ai heavily relies on a few major clients. Additionally, Palantir has achieved profitability, with a 5% margin in Q2, while C3.ai is yet to cross that threshold, with an 89% loss margin, although it’s an improvement from the previous year’s 110% loss margin.

What Now

With C3.ai’s stock declining since August, it is widely seen as a buying opportunity. In the long run, the company holds great potential with its generative AI technology and partnerships with industry giants like Pantaleon and Shell. However, in the short term, it faces headwinds due to increased investments impacting profitability targets.

Investors should keep an eye on C3.ai. While this stock may be a long-term holding for certain growth investors, it’s one I’m not 100% sold on yet. Still, it’s definitely one AI stock to consider.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.