Palantir Technologies (PLTR 5.03%) and Zynga (ZNGA) have enjoyed a surge in interest among retail investors over the last few weeks related to partnerships and the potential for partnerships. Both companies currently rank among the top 100 most widely held on investment platform Robinhood and have seen their share prices jump by 15% and 17%, respectively, in 2021.
Let's explore the reasons why the bull run for these two hot growth stocks could just be getting started.
1. Palantir Technologies
Palantir Technologies is an atypical software company that provides data analytics software to high-profile government clients like the FBI, CIA, and Department of Homeland Security. The stock has performed exceptionally well since its IPO at $10 a share in September (shares are now worth around $25). Management hopes to keep the momentum going by partially pivoting to commercial clients.
Data analytics involves examining large amounts of data to uncover hidden patterns and help inform decision-making. Analysts expect the market for such services to expand at a compound annual growth rate (GAGR) of 12.3% until 2027 because of rising digitization and complexity in the economy. Palantir is benefiting from this long-term trend.
In fiscal 2020, full-year revenue rose 47% from 2019 totals to $1.1 billion. The company's commercial unit, which deals with private clients, grew 107% year over year to make up 44% of sales, while the government-focused business grew 77% to represent 56%.
In February, Palantir inked a partnership agreement with technology firm IBM (IBM 1.86%) to create a hybrid cloud data platform to help businesses maximize large amounts of data. Dubbed the "Palantir for IBM Cloud Pak," this software boasts use cases ranging from finance to telecommunications. And it could help boost growth in Palantir's private sector business. Management expects greater than 30% annual revenue growth over the next five years.
Mobile games developer Zynga is hugely popular among retail investors -- perhaps because of its iconic Facebook games like Farmville and Words with Friends. Those legacy titles have since declined in popularity. But Zynga is still a great way to bet on the video game industry because of its acquisition-driven strategy, which involves scooping up fast-growing independent studios.
Analysts expect the mobile gaming market to expand at a CAGR of 14% through 2025 as smartphone penetration and improving technology power growth in the industry. Zynga and its rival Glu Mobile are two of the few publicly traded pure plays in this space -- but Glu Mobile will soon be taken off the market after accepting a takeover offer from diversified gaming giant Electronic Arts in February.
Some wonder whether Zynga could become the next buyout target for a larger company. In the meantime, it is making acquisitions of its own to help power growth.
In 2020, Zynga bought Turkish developer Peak Games (the maker of Candy Crush) for $1.8 billion and hyper-casual game maker Rollic for $180 million. These assets will help the company achieve its revenue guidance of $2.6 billion in 2021, which represents 32% growth from the prior year. Zynga expects an adjusted EBITDA of $450 million but a net loss of $150 million because of contingent outflows related to its 2020 acquisitions.
Sometimes the crowd is right
Momentum can be a tricky thing. We all remember the legendary short squeezes of late January when investors flooded into mediocre stocks with fundamentals that didn't justify their rallies. That story didn't end well.
But Palantir Technologies and Zynga are not part of that trend. Both companies can potentially deliver market-beating growth because of their strong fundamentals and compelling expansion strategies.