Software platform company Palantir Technologies (PLTR 3.22%) is a popular name among retail investors, who own most of its shares, compared to just 35% ownership by institutions and hedge funds. It behaved like a meme stock shortly after its direct listing in Sept. 2020. Trading opened at $10 per share before shooting up to almost $50 just a few months later. However, the stock has since come back down to about $13 as of this writing.
The company's financials are rapidly improving, and management is laying the groundwork for growth. Here's why Palantir Technologies is a compelling investment today.
Putting the puzzle together
Palantir's complex business and shroud of mystery could be why it's so appealing to retail investors. The company generates 56% of its revenue from the U.S. government, which hides a lot of Palantir's specific duties from the public's view.
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It builds customized software solutions for its clients through its two primary platforms, Palantir Foundry and Gotham. Both platforms are often called "operating systems" for organizational data, with Gotham being used more for government applications and Foundry more for commercial uses.
The company's software helps integrate an organization's data from all sources and allows users to identify trends, run analytics, and improve their decision-making process. Driven by artificial intelligence (AI), the software doesn't replace the human element of decision making; instead, it's more like an aid.
Imagine you set out to assemble a 10,000-piece puzzle -- it might take many hours to sift through and organize the pieces to get started. Palantir's software can act like a guide, telling you which pieces should go where.
Some public examples of Palantir's use include natural-disaster responses, helping detect money laundering, COVID-19 responses, and more. It has helped organizations comply with COVID vaccine mandates by helping track, target, and accommodate employees to get them vaccinated, and to prevent unvaccinated people from breaching protocols. In other words, its software helps users simplify and pursue solutions to complex problems.
Improving financials and solid growth
Palantir has been public for over a year, but a lot has changed in that time. The business isn't profitable yet, posting a $512 million net loss over the trailing 12 months. However, this is primarily due to large share-based compensation packages paid to attract and retain employees.
The business itself is generating positive free cash flow with $320 million reported for the first three quarters of 2021, a massive year-over-year change from negative $285 million in the prior-year period. Palantir's sales process includes little profit (and often losses) when establishing a relationship with a customer. It begins making money later on once customers rely more heavily on Palantir's software for their operations, so its book of business should become increasingly profitable as it matures.
Data by YCharts.
Palantir is confident in its outlook, forecasting annual revenue growth averaging 30% or more through the next four years. It's targeting the private sector to grow Foundry, increasing its commercial customer count 46% sequentially in the third quarter. If Palantir continues generating more cash flow as revenue increases, it should give the company a solid path to eventual profitability.
Valued like a meme stock no more
The stock market ran hot in early 2021, pushing a lot of companies to silly valuations. Palantir was no exception -- its price-to-sales (P/S) ratio routinely went above 30, and occasionally beyond 40.
Such rich valuations set a high bar for a stock, often leading to sharp corrections on things like a less-than-perfect earnings report. There's just no room for error and no margin of safety for shareholders. It also prices in a lot of the company's future growth, which could lead to poor returns if the business needs time for its fundamentals to catch up to the stock price.
The stock has now fallen more than 60% from its 52-week high, presenting a much more reasonable entry point for long-term investors. The stock's P/S ratio is below 20 as of this writing, its lowest since the initial weeks following its market debut. Now, investors have the opportunity to buy the stock at a valuation that could allow its growth and share price to rise together over the coming years.
Palantir should be a rewarding investment if management can hit that 30% growth target, expand its public and private-sector reach, and continue moving toward profitability.
