What happened
Shares of big data software company Palantir (PLTR +1.34%) fell 25.2% in August, according to data from S&P Global Market Intelligence .
Not only did high-growth tech stocks sell off later in the month following Federal Reserve Chair Jay Powell's speech at Jackson Hole, but Palantir also reported earnings. While the prior quarter's numbers were basically in line with expectations, softer-than-expected guidance sent shares sharply lower.
NASDAQ: PLTR
Key Data Points
So what
In its outlook for its fiscal third quarter, Palantir guided for $474 million to $475 million in revenue, well below analysts' expectations of $505.6 million, as well as full-year revenue that also came in lighter than expected.
The culprit was a slowdown in closing deals with the U.S. government, which remains a huge client for Palantir. Large government contracts can be quite lumpy, and it appears the various U.S. agencies may be putting off these deployment in the near term. Of note, management said on the conference call with analysts that its light guidance doesn't incorporate any new large government contracts through the end of the year.
Still, Chief Legal Officer Ryan Taylor said, "As organizations around the world face more pressure and experience more pain, there will be a slowdown in the rate of spending and lengthening of sales cycles, but it will also reveal gaps in enterprises operations, gaps our software can solve."
The news wasn't all bad, as the commercial segment outgrew the government segment, up 46.3% on the year, versus the government segment's 13.3% growth. In the second quarter, government revenue made up 55.6% of revenue, so its slower growth may be masking the momentum Palantir is seeing with commercial customers, who are increasingly turning to big data applications for insights and competitive advantage.
Still, investors are in an unforgiving mood these days, especially for high-growth but profit-less tech stocks such as Palantir. And that mood only darkened after Powell gave a hawkish speech in Jackson Hole, suggesting the Fed could keep interest rates higher for longer. That would be bad for growth stocks, which have the bulk of their earnings power far out into the future.
Now what
For those looking for high-growth software stocks that have been beaten-down in the current interest rate regime change, Palantir may be worth a look. It has a deep relationship with the U.S. military, and with threats proliferating around the world, those government contracts should continue to come through, even if they are delayed in the near term.
Meanwhile, it was encouraging to see the growth in the commercial segment, which shows Palantir's efforts are also catching on there. Palantir also has $2.4 billion in cash on its balance sheet and no debt, putting it in a good position to maintain investment in growth even if the economy slows in the near term. At just 8.6 times sales and just 7.5 times sales on an enterprise value basis, it's not terribly expensive for a big data software stock -- at least on a relative basis.
On the other hand, no one really knows how profitable these money-losing companies today will be in the future, and that's true of Palantir as well. That's why these stocks have seen such wild price swings this year. Another risk is that Palantir pays out a huge amount in share-based compensation to employees and executives, which is a real cost to shareholders.
Therefore, for those looking for beaten-down growth stocks, Palantir should definitely be on your watchlist... but it's still far from a sure bet.
