Many stocks have come across the Wall Street Bets boards over the past year on Reddit, some with strong investment potential and others with little chance of providing returns other than a one-time pop. One name that seems to always come up is Palantir (PLTR -0.84%). Over the past year, Palantir's stock has been on a roller-coaster ride and sits around $11, down 70% from its high after trading above $35 during January 2021.
With its 2021 fiscal year in the books, the company reported solid growth and fantastic guidance. However, the stock still sold off 6% on the day after the earnings call. Is this stock permanently down on its luck, or is there a great investment case brewing for Palantir?
Image source: Getty Images.
Shifting the focus from government to commercial
Much of Palantir's business centers around one thing: analytics. Its Foundry software allows customers to harness multiple data streams and make well-informed business decisions with areas like supply chains or manufacturing.
However, Palantir did not start with commercial businesses. It began with its government-focused Gotham software. Like Foundry, it combs through mountains of data pinpointing patterns that humans can't detect to predict future events. What data Palantir's software processed has sparked lots of debate, as many believe it is an invasion of privacy. Regardless, Palantir's software is good at what it does (some may argue too good in the government's case), and there are multiple uses for it.
The jump to commercial was necessary to continue growing and diversify its customer base. Palantir's finances have been positively impacted by the move as U.S. commercial revenue was up 132% during 2021 and now accounts for 13% of revenue. Total annual revenue grew 41% to $1.5 billion, while quarterly revenue was up 34% to $433 million year-over-year. Looking forward, CEO and co-founder Alex Karp reiterated his annual revenue growth guidance of 30% or more through 2025. If Palantir can sustain 30% growth through 2025, its full-year revenue will be $4.3 billion, a 186% increase in four years.
Significant expansion ahead
For a company generating $1.5 billion in revenue, Palantir has relatively few customers. It grew its user base from 139 in 2020 to 237 in 2021, marking a 71% increase. This meant the average customer spent $6.3 million with Palantir during the year, showcasing how expensive this product is. Still, there are multiple businesses that can afford this software, especially if it means ironing out supply-chain hiccups.
To drive growth, Palantir increased its U.S. commercial sales headcount from 12 at the end of 2020 to 80 at the end of 2021. Palantir is looking to continue 2021's momentum after increasing its U.S. commercial customer base by 371% during 2021. It is going all-out to capture large U.S. businesses, so if it fails to expand, it isn't for lack of trying.
The other growth lever Palantir has is upselling its current customers. The tactic's relative success is captured by the net retention rate, which lets investors know how much customers increased their spending from a similar period last year to this year. Palantir's net retention rates for the fourth quarter were solid across all customer bases.
| Net Revenue Retention Rate | |||||
|---|---|---|---|---|---|
| Commercial Overall | Commercial U.S. | Commercial International | Total Government | U.S. Government | International Government |
| 113% | 150% | 103% | 146% | 141% | 161% |
Source: Palantir.
Government spending remained strong, with the U.S. government spending $1.41 with Palantir for every $1 spent last year. Additionally, Palantir showcased its stickiness as it retained every government customer from 2020 to 2021.
Market disagreement
With these great numbers and fantastic upselling, it's hard to find flaws with these metrics. Although, its profitability is an area many investors take issue with. For the full year, Palantir lost $0.27 per share at an operating margin of negative 27% on a generally accepted accounting principles (GAAP) basis. When stock-based compensation is stripped away, this metric improves to 31%. Palantir spent a massive $778 million paying its employees with stock during 2021. While this is a cheap way to pay for labor (as Palantir can create new shares with a snap of its fingers), shareholders take a hit as their shares become diluted. This is something to be aware of, but if the business grows much faster than its dilution, its effect won't be noticed.
Because of its unprofitability, Palantir saw its valuation get slashed in the recent tech sell-off. From a price-to-sales (P/S) ratio standpoint, it is nearly back to its IPO valuation.
PLTR P/S Ratio data by YCharts.
Now that it has fallen to a reasonable 14 P/S ratio, the stock is beginning to look attractive. At the beginning of 2022, I didn't think Palantir was a stock worth owning in that environment. Yet, with its strong growth projections and falling valuation, Palantir might be a great long-term stock pick.
If you are a growth investor with a three- to five-year time horizon, Palantir could have market-beating potential. Additionally, Cathie Woods' ARK fund has sold almost all of its Palantir stake, so the company should be out of the spotlight, allowing for financial results to steer the company rather than fanaticism. Palantir is doing everything it needs to grow, so investors who can hold the stock without worrying about general market sentiment can generate substantial long-term returns by picking up shares today.
