The internet stock trading platform Robinhood's list of top 100 stocks (as ranked by the number of users holding shares in that company) is an excellent heatmap of where retail investors are putting their money right now. While not every widely held company among users on the platform makes a good investment, some companies do enjoy explosive catalysts for long-term growth. Let's explore why two Robinhood favorites -- Virgin Galactic (SPCE -0.43%) and Palantir Technologies (PLTR) -- have what it takes to make a bull run.
1. Virgin Galactic: Preparing for commercial operations
It's no surprise that Virgin Galactic is one of the most widely held stocks on the Robinhood platform, considering the fascination many people have with space travel. Despite recent setbacks in its spaceplane testing process, the company has the potential to deliver long-term value to investors by working out the kinks in its space-tourism platform.
On Dec. 13, Virgin Galactic cut short its most recent test flight after the engine of one of its SpaceShipTwo spaceplanes failed to ignite. This challenge could pressure the stock in the near term but doesn't destroy the long-term outlook for the company. Testing is the best way to identify potential flaws in Virgin Galactic's space-tourism platform and ensure it is ready for commercial operation.
The mission also demonstrated the effectiveness of SpaceShipTwo's fail-safe safety mechanism, which intentionally halted the ignition of the rocket motor because one of the vehicle's onboard computers failed to connect. According to CEO Michael Colglazier, this seems to be a software or electrical problem instead of a mechanical fault with the engine itself. This is an important distinction because a faulty sensor may be easier to fix.
Virgin Galactic plans to review the data collected during the flight and redo the test in the near future.
The company has already completed 27 of 29 testing elements in its Federal Aviation Administration (FAA)-mandated Verification and Validation program to fly paying customers. And it plans to send its founder, Sir Richard Branson, to space on the inaugural flight in the first quarter of 2021. The recent testing setback could delay this timeline, but with $742 million in cash on its balance sheet and a relatively modest operating loss of $77 million in the third quarter, Virgin Galactic has a substantial runway to complete the remaining elements if quarterly operating cash burn remains consistent.
2. Palantir Technologies: Pivoting to new clients
Palantir Technologies is another compelling growth stock that's currently popular on the Robinhood platform. The software company focuses on big data analytics for high-profile government agencies such as the FBI, CIA, and ICE. And it's poised for continued growth as it expands outside of defense and law enforcement to attract different types of clients that could also make use of its services.
According to the research group Market and Markets, the big data market will expand at a compound annual growth rate (CAGR) of 10.6% until 2025 because of increasing digitization in the economy. Palantir Technologies can capture some of this growth with its software systems designed to identify actionable patterns in datasets. The company installs two primary analytics systems: Gotham, a platform designed for defense and intelligence clients, and Foundry, which is more geared toward commercial applications.
The software has been getting lots of accolades in the healthcare industry. According to CEO Shyam Sankar, Palantir's Foundry is powering the National Health Service of England's response to the coronavirus pandemic. And the company recently earned a $44.4 million contract to help review drugs for the U.S. Food and Drug Administration (FDA).
Management expects full-year revenue to grow 44% to $1.07 billion in 2020. And with a market cap of $51 billion, the stock trades at roughly 48 times sales, which is significantly higher than the S&P 500's average of just 2.7. That's a pricy valuation, but Palantir estimates a total addressable market of $119 billion for its software, and its success in attracting high-profile clients could help it meet the market's lofty expectations.
Investing in growth companies
Palantir Technologies and Virgin Galactic both have the potential for explosive growth over the long term. But Virgin Galactic seems to be the more value-oriented pick because, although it hasn't generated consistent revenue or profit yet, its valuation (based on market cap) doesn't have as much expectation built in.
Palantir, on the other hand, boasts a more established business model. But management will have to work harder to sustain momentum because the stock is already priced for perfection.