High-growth tech companies are typically unprofitable, because they are trying to capture as much market share as possible. Therefore, a crucial part of investing in these companies is understanding the path to profitability, although some companies may never reach that point.
One name recently crossed that threshold: Palantir Technologies (PLTR -3.12%). In the fourth quarter, Palantir squeaked out earnings per share of $0.01 on a generally accepted accounting principles (GAAP) basis.
Palantir will likely attract some investors with its newfound profitability. So is it too late to buy the stock, or can investors still get in at a reasonable price?
Palantir closed several high-dollar deals in the fourth quarter
Palantir's primary product is software powered by artificial intelligence (AI) that helps its clients sift through mountains of data to find useful insights. Originally, the software was intended for government use and reportedly helped the U.S. track down Osama bin Laden. Now, the company is expanding into the private sector and attracting large companies is its primary focus.
It has done a great job of signing new clients with commercial customers reaching 260 at the end of 2022, compared to just 147 in 2021. The reason for the low customer count? The product's price.
Palantir Foundry, its flagship product, can be purchased on the Amazon Web Services marketplace for a cool $1 million per month. This limits its customer base to only the largest clients, but it can still carve out a lucrative niche from that base.
In the fourth quarter alone, the company closed 55 deals worth at least $1 million and five worth at least $10 million. So even though many companies are reportedly cutting back on spending, some are signing huge deals with Palantir.
All this helped grow its revenue 18% in the fourth quarter, slightly slower than the 24% growth reported for full-year 2022. This deceleration will continue into 2023 as management guided for 16% growth for the current year. But what excited investors is the guidance for GAAP net income in 2023, which indicates Palantir's fourth-quarter profitability isn't just a one-time thing.
Still, investors need to look at Palantir's financials to understand exactly why it was profitable.
Profitability picture is not quite clear, but Palantir's improvements are tangible
In the fourth quarter, Palantir reported a $17.8 million loss from operations, a 3.5% loss margin. So how does a company go from an operating loss to a net profit? It had $44.6 million in other income that helped boost its operations into the black. Specifically, the company reported a gain on the acquisition of a joint venture in Japan, so its profitability comes with an asterisk since this was a one-time event.
But that shouldn't overshadow the progress Palantir has made.
Its operating expenses only rose 4% in fourth quarter, much slower than its 18% revenue growth. In fact, Palantir might be one of the few tech companies to have grown operating expenses only in the low single digits during the fourth quarter. One of the most significant factors in this slow rise was a massive decrease in stock-based compensation -- $37.5 million less than the year-ago quarter.
Data by YCharts. TTM = trailing 12 months.
So while the profitability may have been a slight gimmick in the latest report, make no mistake, Palantir is still trending in the right direction.
With the stock trading at 11 times sales, it's still an expensive stock, even if that valuation is not out of the ordinary for the software sector. Palantir rapidly improved its finances over 2022, and this year looks to bring more of the same. With management executing strongly in a challenging economy, I'd say Palantir is a good buy at these levels.
