Layoffs in tech have been the big story over the past several months now. Companies that aggressively hired during the early stages of the pandemic are now cutting costs as demand slows down and as the economy heads into a possible recession this year. But there's one business that is a notable exception to that trend: Palantir Technologies (PLTR 3.73%). The data analytics specialist known for its counter-terrorism software isn't just avoiding layoffs, it's planning to add staff this year.
With that said, here's a closer look at why you might want to have Palantir stock on your radar despite the broad sell-off in tech over the past year.
Palantir to add hundreds of jobs
At the World Economic Forum in Davos, Palantir CEO Alex Karp said that it may hire a couple hundred workers this year, even as many tech companies continue to cut staff. That's not to say that it isn't a possibility down the road, as Karp noted, "Things could get much, much worse, and then of course everything's on the table."
The company's business has been relatively resilient despite the Russian invasion of Ukraine and rising inflation. In Palantir's most recent quarterly results, it reported revenue of $478 million for the period ending Sept. 30, 2022, which equaled a year-over-year increase of 22%. U.S. revenue totaled $297 million and rose 31% from the prior-year period. And even though the company noted headwinds due to foreign currency, it still raised its guidance for adjusted operating income for the year to a range of $384 million to $386 million (versus a range of $341 million to $343 million that it forecast a quarter earlier).
Palantir may have an advantage over tech competition
Many big tech companies that are laying off staff deal with consumer-related products and services. Amazon recently announced its biggest layoffs ever, and last week Microsoft said it would be cutting 10,000 workers in anticipation of slower growth. While both companies benefited from heightened consumer demand during the early stages of the pandemic, they're now feeling the effects of a more fragile economy.
Palantir's business has a lot more stability because it generates the bulk of its revenue from government customers. Last quarter, government-related revenue totaled $273.8 million and accounted for 57% of its top line.
That ratio is likely to change because Palantir's more promising opportunities may be on the U.S. commercial side of things, where revenue grew at a rate of 53% during the period (versus 23% for U.S. government sales). But by not relying on consumer-related revenue, Palantir may be more insulated from the effects of inflation than other tech companies. In a recession, it could struggle as businesses scale back on spending, but the impact may not be as significant on its operations.
Palantir shares tell a different story
Although the business should be a safer buy, Palantir's stock is down 47% over the past 12 months, while the S&P 500 has fallen by only 9%. The company's growth, while impressive, may not be enough to satisfy investors; Palantir's net loss over the trailing 12 months totals $560.8 million. And with the business's operating expenses being a whopping 90% of revenue, investors may be more concerned about the likelihood of the company turning a profit anytime soon.
It offers a stark reminder that growth alone isn't necessarily enough to make a stock a good buy, particularly in a bear market where investors have become wary of risky businesses that don't appear to have sustainable operations. It may be too early to lump Palantir into that category just yet, but the company clearly has a lot of cost-cutting that may be inevitable in its future, and that could end up including layoffs.
Is Palantir stock a buy today?
Hiring additional staff is a good sign for Palantir's growth prospects, but given the its massive expenses, I wouldn't be surprised if sooner or later the company did have to make some drastic cost-cutting moves to improve the bottom line. And so while this hiring news is positive, it's not enough of a reason to buy the stock. Looking at the big picture, the company needs to make more of an effort in bringing its costs down.
Overall, Palantir isn't a stock I'd buy simply because of the long road ahead it has to profitability, assuming it ever achieves it. Unless you're willing to hang on for years and are comfortable with the risk, you may be better off leaving this growth stock on your watch list than in your portfolio.
