After two decades of staying privately held, big-data analytics company Palantir Technologies (PLTR -0.23%) went public in Sept. 2020. The stock quickly rose as popular technology investor Cathie Wood was revealed to be a large shareholder.
However, 2022 was not so kind to technology stocks, and Palantir was no exception. While the company boasts several U.S. government agencies as well as brand-name commercial sector companies on its client roster, Wall Street has expressed concerns about Palantir's near-term growth rate.
Palantir is off to a great start in 2023, and although some of the analyst concerns are valid, its valuation looks appealing for long-term investors.
Buy, hold, or sell?
Equity research analyst Brent Thill of Jefferies recently downgraded Palantir stock from a buy rating to a hold. It is important to note that Jefferies downgraded the company citing broader macroeconomic challenges, in addition to issues specific to the company.
At a high level, Jefferies does not see software companies rebounding in 2023 and therefore is forecasting lower multiples applied to the sector. More specifically, Jefferies is concerned about the rate at which Palantir can sustain its growth.
This is a valid concern, because over the last few quarters, Palantir's management has made it clear the company will be investing aggressively in sales and marketing as well as product development in an effort to jump-start its decelerating growth.
Data by YCharts. YoY = year over year.
Given lingering concerns about a possible recession in 2023, as well as high, albeit taming inflation, corporations are operating lean. They're wary of large expenditures and investments, including enterprise software tools like those Palantir offers. For this reason, Thill's concern about Palantir's near-term and intermediate growth prospects has merit.
There is more than meets the eye
Palantir works with global agencies such as the CDC as well as private companies across a wide array of industry sectors, from retail and defense to cryptocurrency and machine learning.
Another core component of the company's roadmap is strategic partnerships. For example, Palantir recently announced a strategic partnership with Cloudflare. More and more companies of all sizes are relying on data to drive actionable insights. One of the most critical hurdles that these companies face is that cloud computing costs are expensive.
It is not uncommon for companies to use a multi-pronged approach to the cloud with services from Microsoft, Amazon, or Alphabet. As a result, tracking usage and the expenses affiliated with various cloud platforms becomes a major challenge.
According to Palantir's press release, its partnership with Cloudflare "provides an avenue for Palantir Foundry to drive down multi-cloud costs, Palantir Apollo to reduce the burden on DevOps and improve customers' gross margins, and Cloudflare to provide a modern cloud architecture that doesn't restrict customer choice and delivers meaningful cost savings."
This is exciting progress for Palantir. Given the current macroeconomic environment and the challenges that are coming with it in terms of tighter budgets and prolonged sales cycles for enterprise software companies, Palantir is finding new ways to move forward. Strategic partnerships and alliances should not be discounted by investors. Often, partnerships can act as a new type of lead generation for future deals. So far in 2023, Palantir has already announced two strategic alliances. It is quite clear that management is doing what it can to generate long-term growth prospects in a time of near-term uncertainty.
Keep an eye on valuation
A few months ago, I considered the question of whether or not Palantir stock had finally bottomed. In the time since that article published, Palantir's valuation has actually continued to drop. As of this writing, Palantir stock trades at a 7.5 times price-to-sales ratio, right around its all-time low. The company also boasts over $2.5 billion of cash on its balance sheet and does not carry any debt.
Although its near-term growth prospects face headwinds, it is hard to see Palantir stock dropping much lower. The company has made several key investments in sales and marketing as well as product development. The current economic climate is out of Palantir's control (or any other company's control). At its current valuation, long-term investors should be excited about the opportunity to average down and accumulate more shares.
