Share prices of data analysis company Palantir Technologies (PLTR -3.40%) are up 25% this year after a brutal performance in 2022 when the stock crashed 65%. I'm confident this is more than just a short-lived rally, as Palantir's business looks to be in strong shape. The company's recent quarterly results suggest that it could have more room to run.
Here are three reasons more growth is likely ahead for the business and now may be a good time to buy the stock.
1. Palantir's customer count rose 55% last year
Over the past several months, many businesses struggled and scaled back expenses as concerns rose that a recession may be on the horizon this year. But Palantir's business continued to consistently add to its customer count, suggesting that it is more resilient to the effects of inflation than other businesses.
Palantir added 30 net new customers in Q4 2022, with total customers up 9% quarter over quarter and 55% year over year.
Image source: Palantir Q4 investor presentation.
While it has been growing at a decreasing rate, those are still some impressive numbers for Palantir. The nature of the company's software, which helps fight fraud and is used in counterterrorism operations, may make it essential to its customers, especially government agencies.
2. Palantir's net dollar retention rate is high at 115%
Another key metric that's important for the company is the net dollar retention rate, which looks at how much more customers spend versus the prior-year period and it is a good indicator of customer satisfaction. Palantir's net dollar retention rate was 115% in 2022, which was key to the company's strong 24% revenue growth last year.
Image source: Palantir Q4 investor presentation.
Having a strong retention rate such as Palantir's can make it easier to grow revenue since the company doesn't have to be entirely dependent on acquiring new customers for growth. But as seen from the earlier chart, Palantir hasn't had trouble doing that, anyway.
3. Palantir's adjusted gross margins remain north of 80%
One percentage that investors should always consider is gross margin. A high gross margin can enable a company to grow its bottom line more easily over time as the business grows. A low gross margin, meanwhile, can make it much more difficult because a company's overhead will need to be extremely well managed. With Palantir, the company's adjusted gross margin has been consistently over 80% in each of the past four quarters.
Image source: Palantir Q4 investor presentation.
Those high gross margins are a key reason Palantir hit a milestone this past quarter, reporting its first profitable quarter with earnings per share jumping to $0.01, up from a negative $0.08 in the prior-year period.
If Palantir can continue to maintain this high adjusted gross margin, then its bottom line should continue to improve over time along with the company's growth. And as that happens, it can make the tech stock a more attractive buy, leading to better returns for investors.
Why Palantir is a buy
Palantir's business continues to grow. For 2023, the company is projecting revenue of between $2.18 billion and $2.23 billion, while remaining profitable. It does look as though the company has turned a corner, with profitability being the norm from here on out. While the stock did get a boost from the positive earnings report, it has given back much of those gains in the days following as concerns about the economy's future continue to weigh down growth stocks as a whole.
Palantir looks like a potentially underrated buy this year. If the company is able to continue to produce profitable results while growing its business (at a time when many are struggling to do so), there should be much more bullishness surrounding the stock. Buying shares of Palantir now, while they're still down more than 40% from their 52-week highs, could be a good move for long-term investors.
