Has Palantir Stock Finally Bottomed?

Big-data company Palantir Technologies (PLTR -0.09%) hit the public markets in September 2020, and a lot has happened with this company since its debut. Tech-savvy investor Cathie Wood appeared on CNBC on several occasions to explain her investment thesis in Palantir, which was once one of her largest positions. The media hype, combined with meme-stock euphoria, propelled Palantir's stock price to unfathomable heights in early 2021.

However, as market realities began to set in for investors over the last year or so, Palantir was not immune to heavy selling activity in technology stocks. In 2022, the stock is down 58% as of this writing. Moreover, after the company's lackluster first-quarter results earlier this year, investors did not have high expectations going into Q2 earnings in August.

Here's a look at Palantir's Q2 2022 financial results, as well as some of the underlying themes that CEO Alex Karp wrote about in his quarterly shareholder letter. While it may be hard to see on the surface, now may be a generational time to buy Palantir stock at all-time lows.

Image source: Getty Images.

Can a growth company also be a value stock?

When analyzing a stock, one of two terms can generally be applied: growth or value. 

Broadly speaking, growth stocks are companies that generate above-average growth compared to market cohorts. Moreover, these firms tend to focus on investing in the business as opposed to reporting consistent profits each quarter. 

By comparison, a value stock is one that typically trades at lower multiples than its fundamentals or performance as a company may imply that its worth. 

For Palantir, there is a lot of evidence to suggest that the company is operating like a growth company, but trading like a value stock. 

Key performance indicators are more than meets the eye

For the quarter ended June 30, Palantir reported revenue of $473 million, up 26% year over year. While Palantir generated 46% growth from its commercial sector, the company's government business only grew at 13%, its fifth consecutive declining quarter. 

Although this may be a cause for concern for some investors, Wall Street's main bear thesis has primarily focused on Palantir's heavy reliance on large government contracts, as opposed to penetrating the private sector. Palantir's commercial revenue growth for the last several quarters demonstrates how the company has done a nice job of gaining traction outside of government entities.

Data source: Palantir Investor Relations Q2 2022 Presentation, slide 27.

One of the most eye-opening metrics that the company shared this quarter was revenue derived from new customers. For the 12-month period ended June 30, 2020, Palantir reported $901 million in total revenue. Of this revenue, 88% of it was derived from customers that were acquired before January 2019. Stated differently, only 12% of the company's trailing 12-month revenue had come from its newest customers at that point.

If we fast-forward to the current profile, for the 12 months ended June 30, 2022, Palantir has generated $1.7 billion of total revenue, 54% of which comes from legacy customers acquired prior to 2019. This implies that 46% of trailing 12-month revenue is coming from its newest clients, or those signed in 2019 or later. 

This paradigm shift is extraordinary. In two short years, Palantir has effectively generated fairly even growth from its legacy customers and new business. Put another way, this implies that the company's newest customers are buying more software at a faster pace and in a shorter time period than legacy accounts. This isn't entirely surprising when we analyze the company's growth in its U.S. commercial clients.

For the 12-month period ended June 30, 2019, Palantir's U.S. commercial business generated $37 million in revenue, only $3 million of which came from customers signed in 2019 or later. However, for the 12-month period ended June 30, 2022, the company's U.S. private-sector clients accounted for $297 million in revenue, 90% of which came from customers signed in 2019 or later.

This exponential growth in U.S. commercial business is underscored by the fact that the company grew U.S. commercial revenue 120% year over year, compared to 46% in all of commercial revenue. Moreover, Palantir ended Q2 2022 with 119% net dollar retention, implying that the company is far outselling any churn that it experiences across the business.

Keep an eye on valuation

In the quarterly shareholder letter, Karp wrote, "After years of investment, a new high-growth software business has emerged." This is a fascinating perspective on the stock. In some ways, Karp is saying that Palantir should be viewed as a growth company. However, if investors take a look at the stock chart, the company's fundamentals suggest otherwise.

Although it has been a tough year overall for equities, Palantir stock is trading near all-time lows. The stock is trading at just 8.5 times its trailing-12-month sales, compared to 35 times in September 2021. Karp ended his letter by declaring, "We are building an enterprise software incumbent whose depth and reach will continue to emerge over time, and we remain focused on the long term."

As a shareholder, this is particularly encouraging. Management remains entirely focused on the long-term value of Palantir's software over short-term quarterly projections. While it is tough to deploy capital during times of economic uncertainty, Palantir's latest results, combined with management's long-term perspective, makes for a comforting, compelling strategy to lower your cost basis and accumulate some shares at its current low valuation.