Palantir (PLTR -0.58%) stock got crushed following its third-quarter earnings release on Monday morning. Although the big data analytics software specialist continues to attract new customers, investors are concerned and moving away from growth tech stocks in the current macroeconomic environment.
However, not all investors should be so quick to write off Palantir stock. After weighing the reasons to buy and sell, Palantir offers real appeal to a specific type of investor. Let's take a closer look at some of those reasons.
Reason to buy: A lack of true competitors
From a competitive standpoint, Palantir is in an enviable position. It states explicitly that it is not a "data company." It does not collect or store personal data. This fact alone means that Alteryx, Snowflake, and other supposed peers are not competitors at all.
Instead, it provides software that connects data, analytical abilities, and operations. These linkages help organizations make their own decisions, run analyses, and improve processes they can back with data. Its purpose is to bring "the right data together at the right time" to help companies answer questions and decide on courses of action.
With so much data siloed and systems not in communication, this software can provide an invaluable service to national defense agencies and, now, commercial enterprises.
Reason to buy: Palantir's revenue and customer growth
The rising popularity of this software allowed Palantir to generate about $1.4 billion in revenue in the first three quarters of 2022. This is a 26% increase compared to the same period in 2021.
Still, losses from equity investments led to a $405 million generally accepted accounting principles (GAAP) loss in the first nine months of 2022. This is up from a $364 million loss in the same period one year ago.
While free cash flow remains positive, it also took a hit. It generated a positive adjusted free cash flow of $127 million over the first nine months of 2022, falling from $320 million in the same period one year ago.
However, Palantir continues to attract more customers on both the government and commercial sides of the business. Its customer base grew 66% year over year, with the growth reaching 124% in the U.S. commercial sector.
Moreover, business customers demonstrated an increasing willingness to pay $1 million per month for a subscription to its commercial-oriented software, Palantir Foundry. This bodes well for the company's pricing power and the value it creates.
Reason to sell: Valuation
Nonetheless, investors may need to watch its valuation. Perceptions about its multiple changed dramatically from last year amid a falling stock price.
The SaaS stock steadily trended downward since reaching a peak of $45 per share in early 2021. After another leg down following Q3 earnings, it sells at an 85% discount from its all-time high.
Unfortunately for more value-oriented investors, this has not made Palantir a cheap stock. Without earnings, it holds no price-to-earnings (P/E) ratio, and its price-to-sales (P/S) ratio has fallen to 8. Although that is an all-time low for its sales multiple, both Alteryx and artificial intelligence (AI) pioneer Alphabet sell for around 4 times sales. In the current environment, investors may prefer those lower-cost choices.
Should you buy Palantir?
The decision to buy Palantir likely comes down to one's risk profile. The nature of Palantir stock and current market conditions make the stock unsuitable for risk-averse investors.
For risk-tolerant investors, Palantir's bull vs. bear case brings both uncertainty and opportunity. The lack of competitors and focus on AI could make Palantir a valuable holding. Nonetheless, with the valuation continuing to fall from a high level, interested investors should consider adding shares slowly if they choose to buy at these levels.
